They say they are struggling to compile the needed data and to implement policies to comply
Just 10 percent of companies are prepared to adopt the new Financial Accounting Standards Board (FASB) lease accounting standards, according to a recent report by audit firm Deloitte. And it's not that many companies are just procrastinating; only 15 percent of respondents say they expect compliance to go smoothly when requirements begin kicking in as early as next year.
Respondents to the Deloitte survey say the top challenges to lease accounting implementation are collecting necessary data on all organizational leases in a centralized, electronic repository (33.3 percent); and instituting processes to evaluate quarterly adjustments for the balance sheet, as well as profit and loss statements (20.5 percent). The firm surveyed more than 5,400 financial and accounting professionals.
"Following the release of both new lease accounting standards, it's clear that creating a centralized, electronic repository of all equipment and real estate leases held should be a priority for companies with leased assets," said Sean Torr, director leading Deloitte's efforts to advise companies on adopting the new lease standards. "Those organizations facing the fastest compliance timeline are publicly traded and operating on a calendar fiscal year." According to Torr, many are spending this year consolidating lease data so that calculations can begin in early 2017. Compliance with the new rules in 2019 will require lookback reporting for 2017 and 2018.
"Having a lot of leases or just a few complex leases in your portfolio can create management challenges. Other difficulties can arise due to disparate tracking systems, expanding global footprints and M&A activity," said James Barker, national office senior consultation partner, Deloitte & Touche LLP. "If you think your organization may have a tougher time complying with the new lease accounting standards than most, get started developing your implementation roadmap now."
Some Struggle More Than Others
Sectors with higher numbers of leases are expected to struggle the most with implementing the lease accounting standards. Industries with more than half of respondents expressing concern included retail and distribution (61.2 percent); automotive (59.3 percent); telecomm (56.9 percent); process and industrial products (54.4 percent); travel, hospitality and leisure (53.9 percent); consumer products (52.4 percent); health care providers (51.7 percent); and power and utilities (50.7 percent).
"While the new lease accounting standards may seem a niche accounting or finance concern, they are not," says Torr. "I'd encourage any leader of an organization with real estate or equipment leases to take the time now to learn about the potentially broad-reaching impacts of these new accounting requirements. Compliance will likely require input from multiple stakeholders from different parts of the organization. Having top leaders' support could really make a difference in successful implementation."
Early steps to evaluate the implications of the new lease accounting standards, according to Deloitte, include:
- Assessing your organization's current lease landscape, discerning lease volumes and types, availability of electronic lease data and data gaps within them, as well as any potential accounting, tax and process-related challenges.
- Developing a cross-functional project management team to coordinate implementation activities with necessary resources to support it.
- Building a granular implementation plan to manage efforts that may span various business units, file types, IT systems, languages and geographies.
- Planning to invest time in lease data abstraction, as culling contracts to get to details needed for lease accounting and disclosure will require a plan and resources of its own.
- Determining if your organization's IT infrastructure can support compliance with the new standard(s) with which it must comply, including comprehension and management of new storage, calculation and reporting requirements.