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New Lease Accounting Standard to Bring Pain to Many Companies

May 23rd 2016
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Many US companies expect the process of transitioning to the new lease accounting standard to be very unpleasant, according to a new survey by equipment leasing software provider LeaseAccelerator.

How unpleasant? Forty-two percent say implementation will be either “pretty painful” or “extremely painful,” while 3 percent think it will be more painful than root canal surgery.

The Financial Accounting Standards Board on Feb. 25 officially released its long-awaited lease accounting standard, which changes the way public and private companies must account for leases in their quarterly and annual financial statements.

“Many of the leases that companies hold for real estate, aircraft, vehicles, forklifts, office furniture, computers, and data center equipment has previously been off-balance-sheet,” the report states. “Under the current standard, these off-balance-sheet ‘operating leases’ were disclosed in the footnotes of their public filings but will now be reported on corporate balance sheets under the new standard.”

Implementation deadlines vary depending on the fiscal year-end and type of firm. Public companies with a fiscal year ending Dec. 31 must transition to the new standard by 2019. For US Securities and Exchange Commission reporting purposes, companies must provide three years of income statements comparables, with an initial date of application of Jan. 1, 2017.

The survey found that a majority of companies are in the early stages of preparation, with 85 percent indicating they were reading, studying, and getting ready to implement the new standard. Less than 10 percent of respondents say they have the right systems in place to comply with the new rules today.

The following are other key findings of the survey:

  • Equipment leasing lacks a consistent owner at many companies. Thirty-one percent of those with large leasing programs had no designated owner.
  • Most companies do not have an up-to-date inventory of their leases. Sixty-four percent of companies with large leasing portfolios stated it could take months. “The logical conclusion here is that larger companies have larger portfolios and greater decentralization, leading to greater complexity, fragmented processes, less ownership, and worse data quality,” the report states. “In short, the survey respondents indicated that larger companies have a greater challenge and greater risk in complying with the new lease accounting standard.”
  • Most companies do not have a system of record in place for equipment leases. Almost 40 percent were using spreadsheets to track these assets. “Spreadsheets are inexpensive, easy to use, and infinitely customizable,” the report states. “However, spreadsheets rarely go through any testing processes and typically lack any version control. For these reasons, spreadsheets are often problematic for Sarbanes-Oxley audits. Sixty-five percent are not using any kind of database-driven software application.”

3 Tips for Meeting the Lease Accounting Deadlines
Based upon the survey’s findings, LeaseAccelerator recommends that companies consider the following three actions to ensure they meet the deadlines for the new lease accounting standard:

1. Sense of urgency. Companies should get started now. Although the first implementation deadlines are not until 2019, companies will be required to provide three years of income statements and two years of balance sheet comparables. Those that wait until the last minute may not be able to reverse engineer the debits and credits needed for their comparative reporting (back to 2017 or 2018).

2. Consider enterprise lease management applications. Companies should consider adopting an enterprise lease management application for managing their equipment leases, particularly those with large portfolios in excess of $50 million. Not only will an enterprise application accurately accelerate compliance efforts for the new lease accounting standard, but it will provide better controls for lease-versus-buy analysis and reduce evergreen fees with better end-of-term management. The key capability required for the new standard is the ability to track changes and generate debits and credits at the asset level.

3. Assign ownership. Companies should appoint one, clear owner for their equipment leasing programs. This means a top executive in procurement, accounting, treasury, or shared services should be selected by the CFO. The executive should be charged with establishing and managing consistent processes, policies, and controls across all categories of leased equipment, geographic regions, and product lines. Additionally, the owner should act as the executive sponsor for adopting systems to automate the equipment leasing lifecycle, including the accounting to comply with the new standard.

More than 150 professionals from finance, accounting, treasury, and tax organizations at Fortune 1000 companies responded to the survey.

Related articles:

The Wait is Over: FASB Issues New Guidance on Lease Accounting
10 US Companies Most Impacted by New Leases Standard

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