It’s been more than a year since the Financial Accounting Standards Board and the International Accounting Standards Board each issued new guidance on the reporting of leases on financial statements.
PwC and CBRE Group have issued their latest report card on companies’ ongoing efforts to comply with the new lease accounting rules – and the results are mixed.
According to the recent survey of more than 600 finance executives from a variety of industries, 23 percent of organizations haven’t even started assessing the impact of the changes, while 52 percent are still in the assessment phase.
Of the 23 percent that haven’t started, most (73 percent) are private companies with fewer than 1,000 leases – and a 2020 compliance deadline.
On the other hand, public companies with thousands of leases that are facing a 2019 compliance deadline risk running out of time, the survey report states. Nearly half (47 percent) of the companies that have begun implementing the new guidance say the process is requiring a bigger effort than originally thought.
The biggest hassles lie in data collection and systems, according to the survey report. Most respondents (75 percent) describe their issues as “somewhat or very difficult.” The majority also are mining data from their leases manually, while others on far smaller scales are using third parties, technology, or direct requests to lessor vendors.
Most companies (66 percent) expect to make some type of system change, with 43 percent indicating they will put a new lease management system in place. Though 25 percent say they may not have enough time for the changeover, nearly half are evaluating vendors or have already chosen a system.
Still, the changes aren’t easy. Forty-three percent of companies expect transition costs of less than $250,000. But those companies are still assessing the new standard or haven’t even begun – and about half don’t expect to change their systems.
It’s all hands on deck for implementing the changes at 72 percent of companies, while about 23 percent are hiring consultants and 10 percent are hiring more staff. And 85 percent expect to dedicate up to four full-time staffers to their leasing transition.
All that said, companies have decidedly mixed views on the benefits of the new lease accounting standards. While one-third expect to improve their lease portfolio reporting and cost transparency, 29 percent don’t expect any improvements, and 10 percent weren’t sure.
Other key takeaways from the survey include:
- The majority (66 percent) of respondents have formed an internal working group to address the new lease accounting standards.
- Few companies say they’ve changed their lease vs. buy decision-making (4 percent have for real estate assets, and 9 percent have for other assets).
- The new standards will require renegotiation of existing debt covenants for 13 percent of companies.
- Fewer than a quarter (18 percent) have begun setting up new lease accounting processes and controls.
About Terry Sheridan
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.