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Is New Lease Accounting an Opportunity for Profit?

Jan 26th 2016
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The changes to global lease accounting have arrived, so many of your clients should be making the most to capitalize on the development of their leasing operations.

On Jan. 13, the IASB released the final, published version of IFRS 16 Leases, revolutionizing the way businesses account for the leased assets that are vital to their corporate success.

The new regulations will capitalize all leases and therefore require all lease types to be included as asset and liabilities within company balance sheets; under the current rules, operating leases may be excluded and instead recorded in the footnotes. During this transitional period, companies will have to produce comparable figures including both the newly implemented standard as well as using the current rules (either IAS 17 or FAS 13).

Progress in the finalization of a global standard that aims to provide clarity and comparability by effectively removing operating leases has understandably been slow. Although there have been reliefs offered, this exercise will still require businesses to revise, collate, and report two sets of figures, adding unavoidable cost and time-processing burdens.

The Lease Accounting Threat has Lost Urgency

Leasing is unlikely to have appeared at the top of the majority of finance directors’ to-do lists in a long time and the continual delays in the earlier stages of producing a new global lease accounting standard have put formulating a contingency strategy on the back burner.

A survey by CIT Group and CFO Research revealed that although 65 percent of midsized businesses view leases as critical to their company’s growth, 78 percent have yet to evaluate the potential impact of the proposed changes on their financial statements.

With the IASB announcing Jan. 1, 2019, as the effective date of the new lease accounting regulations (Dec. 15, 2018, for US GAAP users) and companies potentially needing to provide comparative reports up to two years before this implementation, now is the time for us to take action.

Leading accounting firms have already warned of the dangers of complacency to lease accounting changes, such as Chris Biggs, director of CMAS Accounting Advisory at PwC, who cautioned, “2019 may sound a long way off; however, there is going to be a significant amount of complexity in applying this standard. Potentially a lot of work to initially identify the relevant agreements and then the complexity of what to do with them, once you’ve found them!”

Finance Leaders Want a Silver Lining

The first step toward achieving full accounting compliance is for companies to collect and review all of their active leases so that they can gain a clearer understanding of how their operations will be affected. Finance directors will be looking for a suitable ROI to validate the required investment in resources and time needed to maintain full compliance.

In his video debrief launched alongside the publication of IFRS 16 Leases, IASB Chairman Hans Hoogervorst referenced the “new awareness” past accounting reforms have given business leaders, suggesting; “The new standard will also provide management with better insight in the true extent of their lease liabilities”.

Martin Kennard, director of lease portfolio management specialists at Innervision, agrees: “The data collection process required for implementation of the new lease accounting standards provides companies with greater visibility and understanding of their current lease portfolios; this valuable information should be used to develop long-term efficiency.”

By combining the need to gather data alongside reviewing the leasing process generally, companies can highlight inefficiencies, reveal unnecessary overspends and identify unaccounted leases; as well as opportunities for negotiating better leasing deals and reducing costs.

Making the Most of the Transition

Lease accounting changes are unavoidable for those utilizing IFRS or US GAAP as Deloitte UK’s National Head of Accounting, Veronica Poole, recently warned: “Companies have thousands of leases and they will have to go through them lease by lease.” The long-term accounting benefits are clear, but it would be foolish to think that businesses are going to happily transform the way they account for potentially thousands of leased assets without some form of tangible return.

It seems unlikely that the changes to lease accounting alone will provide this desired return; that will be found within the execution, utilizing smart technologies and long-term foresight to ease the financial and operational burden.

Regardless, businesses will need to invest in order to make the required changes and remain compliant with the accounting regulations. However, if this investment is well-planned and placed, they may in fact see a return on their efforts.

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