Taking stock of leases

BY KEN TYSIAC
November 1, 2013

In anticipation of a new global standard on financial reporting for leases, Johnson & Johnson created a central repository for thousands of leases it has across hundreds of reporting units in 60 countries. J&J global lease implementation project leader Judy Ryan, CPA, gave tips during a KPMG webcast on how a company can create and use a lease inventory:

  Get support from senior management. The backing of top company executives helps the team creating the inventory get cooperation from numerous business units.

  Create awareness early. Unless staff members are closely following the lease accounting project undertaken by FASB and the International Accounting Standards Board, they may not be aware of the reasons for creating an inventory. Comment letters were due Sept. 13, and the boards have indicated that they hope to have a final standard in place in 2014, with an expected implementation date of not earlier than fiscal years beginning on or after Jan. 1, 2017. The proposed standard, available at tinyurl.com/ldedjoo, would create the need for many new data points that are not included in current lease accounting. The increased complexity has caused some experts to say companies may want to create a global inventory of leases to facilitate smooth financial reporting.

  Choose a technology solution. A new technology platform is likely to be needed to gather the data for the calculations. The tool’s ease of use and the level of training needed for users were among the factors J&J considered in selecting its technology platform.

  Train your staff. Employees need to be taught how to use the technology, and it’s helpful to explain to them why they are collecting the data.

  Leverage existing data. Creating templates for uploading data that already exist in a company’s systems is a lot easier than entering information manually. J&J developed a template and upload process that allowed staff to input large volumes of leases with similar characteristics all at once. This saved the company a significant amount of time.

  Develop a phased approach. The inventory process should start with just a few business units. This will allow troubleshooting any potential problems that occur and improving processes as additional business units are incorporated in future phases.

  Create customized reports for each business unit. Customized reports gave J&J a high-level snapshot of the rental cash flows for each business unit, which helped with some of the other processes involved in building the inventory.

  Test your data. Once the inventory is built, it should be reconciled with records to verify accuracy and completeness.

  Continue inventory upkeep. As leases are added, subtracted, or changed, affiliates in the business units need to enter those changes in the central repository.

  Find additional value. This process is not designed just to make compliance easier. J&J plans to do comparative modeling to see how changing lease terms or discount rates can affect the company’s asset liability and P&L statement. Also, the company is trying to understand whether certain assets should be leased, or whether it would be more economical to buy in the future. Having the central repository can help a company evaluate which business decisions would make sense today as well as in the future if and when a new standard takes effect.

By Ken Tysiac ( ktysiac@aicpa.org ), a JofA senior editor.

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