Are Companies Starting to Make Progress on Lease Accounting?
In a finding that surprised even the survey’s sponsor, a majority of respondents to a survey conducted by LeaseAccelerator indicated they are well on their way to adopting the Financial Accounting Standards Board’s (FASB) new lease accounting rules.
The recent one-year anniversary of the FASB issuing Accounting Standards Update No. 2016-02, Leases (Topic 842), prompted LeaseAccelerator to survey 250 finance and accounting executives about the progress their companies have made in preparing for the new leases standard, which goes into effect beginning in 2019.
The survey reveals that two-thirds of companies are ahead of schedule or right on schedule for adopting the standard, and 70 percent have assigned a project manager. But 30 percent don’t yet have a budget, while 25 percent haven’t started the process at all.
Michael Keeler, CEO of LeaseAccelerator, a provider of equipment lease management software, admits to a “disconnect” between what he sees in the marketplace and how the executives answered the survey. The lack of preparation by many of the companies “will create a lot of project risk between now and the implementation deadline,” Keeler said in an email to AccountingWEB.
US public companies will be required to adopt the new standard for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018. Private companies will be required to apply the new leases standard for fiscal years beginning after Dec. 15, 2019, and interim periods within fiscal years beginning after Dec. 15, 2020.
“The time box for the project is quickly shrinking when you consider that most companies won’t make systems changes in the last quarter of their fiscal year due to systems lockdown for SOX 404,” Keeler said. “There are really only five or six quarters remaining for the thousands of public companies to get their financial reporting ready. They are way behind the curve and may not yet realize it.”
Survey respondents hail from US-based public and private companies with revenues of at least $1 billion. Approximately 60 percent have lease portfolios of less than 500 leases, and 25 percent have more than 1,000 leases. Fewer than 10 percent are LeaseAccelerator customers.
Here’s a closer look at the survey’s findings:
- Most of the companies find the project to be more complex than they expected. The biggest challenge is changing processes, policies, and controls to support it.
- Equipment leases and leases within service contracts and outsourcing agreements are the toughest to analyze.
- About 70 percent of respondents have defined a systems strategy and plan to replace spreadsheet-based tools with a proper lease accounting software app. But less than a third have issued a request for proposals, selected a vendor, or started uploading data to new software.
- While accounting and finance teams are on board with the project, only about a third have included the C-suite and real estate and IT teams. Even fewer than that have an enterprise-wide team that includes operations, treasury, and procurement staffers.
How to play catch-up? LeaseAccelerator recommends these five tips:
1. Allow time for testing and reconciliation. Most companies have three to nine months of test runs before transitioning to the new standard.
2. Extend beyond accounting to a cross-functional project team. Expand the project team to include IT, procurement, and treasury because of their respective roles involving new software; new lease transactions, end-of-term equipment buyouts, or long-term real estate renewals; and credit relationships with lessors.
3. Appoint an executive sponsor to oversee complex projects. Companies with a mix of real estate, vehicle fleet, data center, material handling, and transportation equipment leases will need to involve operations teams and business units to complete the project. Procurement, treasury, and legal need to be involved as well.
4. Secure a budget and resources. To mitigate risks, don’t wait until 2018. Seek out creative ways of funding the project this year.
5. Develop a contingency plan for implementation support. Companies with more complex international lease portfolios should have a contingency plan in place should they need to augment staff.
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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.