Lease accounting implementation a challenge for preparers

Companies are encountering challenges with new lease accounting standards in a process few expect to be easy, according to a recent Deloitte survey.

Almost half (47%) of more than 5,400 respondents in a Deloitte webcast poll of financial and accounting professionals in March said it would be at least somewhat difficult to implement the new standards, while just 15% said implementation would be at least somewhat easy.

“Having a lot of leases or just a few complex leases in your portfolio can create management challenges,” James Barker, a senior consultation partner with Deloitte & Touche LLP, said in a news release. “Other difficulties can arise due to disparate tracking systems, expanding global footprints, and M&A activity.”

FASB and the International Accounting Standards Board (IASB) issued new lease accounting standards in the first quarter of this year in an effort to provide more information to investors. Although the standards are not converged, they both require lessees to report assets and liabilities related to leases on the balance sheet.

When FASB’s standard was issued, FASB Vice Chairman James Kroeker said it was constructed to be cost-effective and cost-efficient by allowing companies to leverage their existing systems. But the survey indicated that challenges remain.

One-third of respondents in the Deloitte survey said their biggest implementation challenge over the next 12 months would be collecting necessary data on all organizational leases in a centralized, electronic inventory.

Evaluating adjustments

Another top concern, voiced by about one-fifth of respondents, is developing and instituting processes to evaluate quarterly adjustments and reassessment for the balance sheet and P&L as required. One-fourth of respondents said they don’t know what the top challenge will be, or the question was not applicable.

The majority (61%) of the survey respondents said they will be complying with FASB rules only, and 19% said they would report under both FASB and IASB rules.

FASB’s standard will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018. For all other organizations, FASB’s standard will take effect for fiscal years beginning after Dec. 15, 2019, and for interim periods within fiscal years beginning after Dec. 15, 2020.

“Those organizations facing the fastest compliance timeline are publicly traded and operating on a calendar fiscal year,” Deloitte & Touche LLP Director Sean Torr said in a news release. “Many are spending the balance of 2016 consolidating lease data so that calculations can begin in early 2017, as ultimate compliance with these new rules in 2019 will require lookback reporting for 2017 and 2018.”

The new lease accounting requirements are not a niche finance and accounting concern and may have broad-reaching impacts that require input from multiple people from different parts of an organization, Torr said. He recommended that companies with leased assets create a centralized, electronic repository of all their equipment and real estate leases.

In addition, Deloitte recommends that early steps in implementation can include developing a cross-functional project management team, building a granular implementation plan, investing time in extracting lease data from contracts, and determining whether the organization’s IT structure can support compliance.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.