Lease standard implementation falls behind schedule

The lease standard the FASB published in February 2016 was billed as the accounting change that would have less impact than the wide-ranging revenue guidance that goes into effect for public companies in less than six months.

But as businesses and auditors dig into the details of the FASB’s lease accounting overhaul, they are finding the workload heavier than expected. More worrisome, as the lease standard’s 2019 effective date for public companies looms, many businesses are behind where they need to be to properly follow it, a recent survey shows.

It is not because the details of the new accounting are so complex but because they reach so many day-to-day transactions. Businesses rent everything from storefronts to airplanes to cash registers, and the FASB’s Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), will require them to report the costs of the transactions on their balance sheets for the first time.

The mere act of gathering up all the details on the rentals can be an onerous first step.

“Real estate typically is more centralized, just because of the nature of that business, but equipment leases? We’re having people pull those out of file cabinets and drawers,” said Matt Waters, a lease accounting consultant and the lease accounting manager at Home Depot Inc., from 2007 to 2013. “So that data collection effort process is huge.”

A retailer like Home Depot will have to sort through rental agreements for thousands of leased fork lifts and, separately, the rented batteries for each forklift, Waters said. Some companies will likely uncover leases in unexpected places. Many retail stores pipe in music for customers when they shop, and the rental for speakers or satellite receivers can represent a leased asset and corresponding liability to make payments that will have to be recorded on balance sheets, he said.

To properly comply with the lease standard, businesses may have to comb through more contracts than they think, said Deloitte & Touche LLP partner Derek Bradfield.

“In addition to just understanding where all your leases are that have the word ‘lease,’ you have to identify where there are leases that aren’t in traditional leases contracts,” Bradfield said.

The lease accounting standard was published after a decade of debate and in response to years of complaints — and urging from the SEC — about companies bending FASB ASC 840, Leases, to keep debts off their balance sheets. With the publication of ASU No. 2016-02, ASC 840 will be phased out.

ASC 840 says companies only have to record lease obligations on their balance sheets when the arrangements are akin to financing transactions, such as rent-to-own contracts for buildings or vehicles. Few actually get recorded because of what critics call “bright lines” in the standard that give the companies the leeway to arrange deals to look like simple rentals. If an obligation is not recorded on a balance sheet, it makes a business look less leveraged than it really is.

Critics for years have said that a retailer that pays rent for hundreds of stores has just as many financial obligations as a competing chain that takes out mortgages to buy them. Analysts and investors have long done back-of-the-envelope calculations to estimate a company’s lease obligations to conjure up a better picture of its financial health. But when ASC 842, Leases, goes into effect, it is expected to swell both the assets and liabilities sides of company balance sheets. Assets are expected to soar at many companies to reflect the property or equipment they lease, and the payments they are contractually committed to meet to use the leased assets are projected to increase liabilities.

Companies still have a lot of work to do to follow the new standard. A June 27, 2017 survey of large public companies by Ernst & Young LLP showed 27 percent believed they were on track to meet milestones to comply with the new rules. Many cited difficulty collecting data or not having enough manpower to devote to the task.

Companies also are likely tied up with the last-minute details involved with implementing the FASB’s more sweeping revenue recognition standard, which the board published in May 2014 as ASU No. 2014-09, Revenue From Contracts With Customers. Public companies must follow the new revenue standard, which require major changes to how organizations calculate the top line in their income statements, in less than six months.

“From a technical accounting perspective, it’s not that complicated,” EY partner Anastasia Economos said of the lease standard. “What’s complicated is the actual, ‘How do you do this? How do you get information to calculate it? How do you do the calculation?’ Also, a very significant thing is that it requires a lot of different people in an organization to be able to get to the information.”

As 2019 creeps closer, companies should not underestimate the work involved with the leases standard, said Deloitte partner Jeanne McGovern.

“We are trying to raise the alarm at this point because it takes a lot of runway to gather the data needed here,” McGovern said. “And I think people are finding that to be a much more onerous process than originally thought.”

For in-depth analysis of the FASB’s standard for lease accounting, please see Catalyst: US GAAP — Leases, also on Checkpoint.

Additional analysis of the lease standard can be found at Accounting and Auditing Update Service [AAUS] No. 2016-15 and [SARU] No. 2016-13 (March 2016): Special Report: Accounting for Leases—An Explanation and Analysis of Accounting Standards Update No. 2016-02.

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