Multiple Challenges Coming With New Lease Accounting Standard
With a new lease accounting standard looming on the 2019-20 horizon, many companies are scrambling to plan for the transition, whether in advance of the deadline or on-time.
Public companies need to adopt the new standard by Q1 2019 for most calendar year-end public business entities, while all other organizations are required to adopt it by 2020. Non-calendar year end companies receive extra time.
The new standard is designed to improve financial reporting about leasing transactions, which could have a direct impact on balance sheets and financial reporting, and present significant implementation challenges. Despite the impending deadlines, a recent Robert Half and Protiviti (a Robert Half subsidiary) survey found fewer than half of the companies surveyed have begun the transition process.
“Firms that haven't started, risk being in catch-up mode the moment they do and scrambling to find experienced professionals who can quickly step in to help organizations meet the new guidance," Robert Half Management Resources executive director, Tim Hird, said in a statement.
According to their research, more than half of the surveyed companies (56 percent) have not begun the transition to the new lease accounting standard. Small companies are more at risk, with only 37 percent of the smallest organizations transitioning, compared to 69 percent of the largest firms.
According to Protiviti managing director Chris Wright, all companies, whether public or private, need to begin with the basic understanding of taking an inventory of how many leases they have and where they are.
“Companies that discover they have a lot of leases and in a number of locations may find that using a manual spreadsheet will not be sufficient and they should move into developing a project plan and assembling a steering committee,” he says. "Adopting the new standard requires a substantial effort to prepare a firm's people, processes and systems,” Wright adds.
“For example, identifying and implementing a lease administration system and abstracting relevant data from leases requires a significant investment of time and resources. Although lessons learned from the revenue recognition transition are valuable, not every organization was as impacted by that standard as they will be by new lease accounting rules," he says.
Among the challenges companies face, staffing is a top consideration.
“You may have a lot of people on staff, but these people have walked an extra mile last year implementing the revenue recognition standards,” Wright says. “It’s difficult to ask the same people to walk an extra mile again this year without added stress and lowering morale.”
Hird recommends investigating alternative ways of staffing – whether using contractors, consulting firms, third parties or interim professionals. Even among companies that have moved to adopting the standard, much work remains, survey results indicate.
Fewer than half of respondents (48 percent) reported completing an assessment of how much needs to be done. The top three challenges firms face in the transition include training staff, diagnosing the needed changes and finding professionals with the requisite expertise.
However, the research suggests finance leaders see previous revenue recognition work as a stepping stone for lease accounting. What’s more is seventy-one percent of financial executives reported the revenue recognition transition has been the more challenging of the two standards, and 83 percent expect to apply at least some of the experience from that process to the lease accounting adoption.
“Although lessons learned from the revenue recognition transition are valuable, not every organization was as impacted by that standard as they will be by new lease accounting rules," Wright says.
In summary, "Staffing lease accounting initiatives often proves difficult for organizations,” says Hird. “Because the guidance is still relatively new, many companies lack the necessary expertise. In response, businesses are working with outside consultants and interim professionals, either to access the requisite skills or to help cover day-to-day accounting needs left open by full-time employees taking on lease work," Hird says.
What advice does he have for companies impacted by the new standard? “Start early,” he says.
Robert Half and Protiviti have come up with a 9-point project plan to help companies plan for the transition.
These steps include:
1. Establish a steering committee
2. Determine available transition methods
3. Perform Gap analysis and establish an execution framework
4. Assess reporting system capabilities
5. Establish a transition strategy
6. Establish a transition project management office
7. Update critical accounting polities
8. Update financial reporting controls
9. Update financial statement and other reports