8 things to know about lease accounting implementation

November 29, 2018

Published: Journal of Accountancy

The changes brought about by FASB’s new lease accounting standard are coming into full view for finance departments that use U.S. GAAP for their financial reporting.

Many public companies are in their last stages of implementing the standard, which takes effect for them at the beginning of next year.

FASB gave private companies an extra year to comply, and already many of those companies have begun creating an inventory of their leases and extracting the data that will be needed to comply with the new standard.

Here are eight things company finance departments need to know as they work through the significant changes associated with the new standard, which will bring all leases onto the balance sheets for lessees in an effort to provide more transparency to financial statement users:

Implementation is a big challenge. An overwhelming majority (87%) of companies surveyed by PwC at the beginning of the fourth quarter said adopting recent accounting changes (including the revenue recognition and lease accounting standards) has been somewhat or very difficult. With regard to the lease accounting changes, the portion of respondents rating the following items as at least somewhat difficult was 77% for ensuring completeness of the lease population; 72% for identifying embedded leases; 69% for collection, quality assurance, and remediation of data; and 66% for human capital or resource requirements.

Public companies are making progress. The PwC survey showed that just 4% of public companies have completed their lease accounting implementation, but 80% have their implementation in progress. Another 13% are assessing the impact of the standard, and just 3% have not started. Nonpublic companies, which have an extra year to implement the standard, are fairly evenly split between implementation in progress (35%), assessing the impact (35%), and have not started (28%).

Testing is an important step. Many public companies are going through an important late-implementation exercise of testing their systems, according to Sheri Wyatt, CPA, a partner with PwC’s Accounting Advisory practice. Some of this testing takes place through sample use cases that will mimic actual uses of companies’ lease accounting systems. Companies will run the use cases through their systems and also will calculate them manually or through Excel. If the results are materially different, the company will have to resolve those differences.

Systems decisions have varied. More than half (58%) of public companies said in the PwC survey that they are implementing new lease management systems, while 17% said they are modifying or upgrading existing systems. Almost one-fourth (22%) are using desktop applications such as spreadsheets. “I think certainly companies with large portfolios … [with generally] in excess of 1,000 leases are looking for a system to leverage,” Wyatt said. “I do see a lot of smaller portfolio companies that are saying, ‘I can do this using a spreadsheet.’” Nonpublic companies are more likely than public companies to plan to use spreadsheets, but Wyatt said more nonpublic companies may find they need lease management systems as they get deeper into implementation and learn more about their needs.

Process improvements are possible. Although many companies are rushing to get into compliance, improvements in accounting processes also are being made. “Public companies view this as an opportunity to enhance and streamline their lease accounting process that to date has been largely manual through spreadsheets,” Wyatt said. “[They are] trying to identify some efficiencies as well as just better controls around that process, and so the system is a great tool [for companies].”

Operational benefits may be explored. Some companies are looking at their automated processes for lease accounting and thinking about additional automation that may improve their accounting, Wyatt said. As companies have gathered all their leases into one repository, they are also seeing opportunities to take advantage of economies of scale. “If I have leases with a particular company across the business units that are individually negotiated, what if I combine it and have one master lease and negotiate centrally?” Wyatt said. “Are there ways I can reduce the costs?”

Lease vs. buy decisions come later. Because lease liabilities will be reflected on balance sheets, one of the advantages of leasing instead of buying is getting taken away. This may mean that companies will be more inclined to purchase items instead of leasing them, but Wyatt said many companies are too busy with compliance right now to consider that issue. “For certain assets there may be a shift,” she said. “It’s a little early to tell. I do know of a few clients that have been looking at some of their technology arrangements to see whether there should be a shift from lease versus buy.”

Private companies can learn from public companies. Wyatt said some of her public company clients that don’t have calendar-year reporting schedules are learning from the calendar-year companies. She said private companies also should pay attention to the implementation challenges faced by public companies. “Yes, you have an additional year,” she said. “But don’t underestimate the effort and that you would benefit from that extra year to make sure you don’t have some of the hiccups that maybe some of our public companies may be facing now.”

https://www.journalofaccountancy.com/news/2018/nov/lease-accounting-standard-implementation-201820151.html

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