As US companies prepare to implement the forthcoming lease accounting standard from the Financial Accounting Standards Board (FASB), a new study by equipment leasing software provider LeaseAccelerator indicates predictably that companies with large operating lease obligations will be most affected. As such, they also face the highest risk of failing audits.
IFRS 16 Leases, the global lease accounting standard issued by the International Accounting Standards Board (IASB) on Jan. 13, and the new US lease accounting standard, which the FASB is expected to issue by the end of first quarter 2016, will require companies to transfer their operating leases, previously only disclosed in the footnotes of their financial reports, onto their balance sheets starting in 2019.
Citing the IASB, the LeaseAccelerator study indicates that listed companies are estimated to have about $3.3 trillion of leasing commitments, ranging for individual companies from a few million dollars to tens of billions of dollars. More than 85 percent of those commitments don't appear on companies' balance sheets.
Thus, the study Who is Most Impacted by the New Lease Accounting Standards? was undertaken, according to LeaseAccelerator, âto identify and rank those companies that have the largest off-balance-sheet future payment obligations based on public data, as it is reasonable to assume that these companies will have the greatest challenge in preparing for the new standard and likely will face the highest risk and experience the most significant impacts of audit failure.â
âWith comparative reporting requirements for the new lease accounting standards starting as early as 2017 for most firms, we believe that many Fortune 500 companies are woefully unprepared for the new lease accounting standards, especially their equipment lease portfolio,â LeaseAccelerator CEO Michael Keeler said in a written statement. âWe hope the publication of this report will provide CFOs with a perspective on the relative size and significance of their operating lease obligations compared to their industry peers and prompt a proactive investigation of solutions given the 2017 income statement comparables deadline.â
LeaseAccelerator compiled a list of the 500 largest US public companies, ranking them according to the size of their off-balance-sheet leasing obligations. The identified companies were listed in Fortune magazine's most recent Fortune 500 study.
Operating lease obligations were derived from companies' most recent 10-K filings with the US Securities and Exchange Commission. Data was compiled last September, so most companies' fiscal year 2014 reports were used. LeaseAccelerator says it didn't calculate or manipulate leasing obligation data.
Here's the top 10 ranked by leasing obligations (in millions):
Walgreen Co. ($33,721)
AT&T Inc. ($31,047)
CVS Health ($27,282)
Wal-Mart Stores Inc. ($17,910)
FedEx Corp. ($16,385)
Bank of America Corp. ($14,406)
Verizon Communications Inc. ($14,403)
McDonald's Corp. ($13,160)
United Continental Holdings Inc. ($13,000)
Delta Air Lines Inc. ($12,741)
US public companies will be required to adopt the new leasing standard, once it is issued, for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018. For calendar year-end public companies, this means an adoption date of Jan. 1, 2019, and retroactive application to previously issued annual and interim financial statements for 2018 and 2017.
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.