5 strategies to efficiently implement the new lease accounting standard

As mandated by regulators, Sealed Air is implementing the new lease accounting standard on schedule.

The standard will take effect Jan. 1, 2019, for public companies and one year later for private companies. Implementation requires public companies to restate 2017 and 2018 and private companies to restate 2019.

Sealed Air started preparations in 2016 and will increase time and efforts this year to bring all leases onto the balance sheet.

That means the multinational manufacturer of packaging material will be working harder on implementing the new lease accounting standard while efforts to implement the new revenue recognition standard are in full swing. It’s a challenge many companies are facing in 2017.

“The burden on organizations for financial reporting change will be greater in 2017 and 2018 than we have experienced in recent history,” said Sean Torr, CPA, CGMA, lease accounting services leader at Deloitte. “These are two significant standards that impact a broad number of transactions within a company.”

Planning ahead, he said, is crucial to avoid having to do things over, find synergies, and minimize disruptions.

Sealed Air, for example, hired two accountants to help implement the two standards back to back, said Michael Leon, CPA, assistant corporate controller at Sealed Air.

“You have revenue recognition going live in 11 months and one year after that, leases,” he said. “We, like many companies in our position, are attributing the preponderance of the resources to the revenue standard first, and then whatever time and efforts we have left, we put into the lease standard.”

Understanding the changes required by the two standards has already taught the company one significant efficiency lesson, Leon said. As a diversified manufacturer with customers in 169 countries, Sealed Air acts as a lessee and a lessor of equipment. Work done to adopt the revenue recognition standard turned out to represent the bulk of the work that needs to be done on the lessor side of the business to implement the lease accounting standard.

The lessee side of the business will be an inventorying of lessee arrangements exercise that will ramp up this year, Leon said.

Of more than 3,300 accounting professionals polled by Deloitte in October 2016, 33.8% said they were somewhat prepared to comply with the new lease accounting standard. Another 13.8% of the respondents said their companies were extremely or very prepared, and 28% said they were not too or not at all prepared. Leon considered Sealed Air somewhat prepared.

Nearly one-quarter (23.6%) of public companies and 36.4% of private companies are adopting the lease accounting standard on schedule as regulators mandate, the Deloitte survey suggested. Another 4.8% of public companies and 6.7% of private companies are early adopters.

Survey respondents said their companies will step up efforts this year to collect necessary data on all leases in a centralized, electronic inventory (24.7%); implement multiple new accounting standards (16.3%); figure out where to start the implementation process (15%); and determine whether IT solutions currently in place for tracking lease data can manage implementation and compliance with the new standard (9.4%).

How much time and effort is required to implement the new lease accounting standard will vary from company to company. Depending on how many leases a company holds, how spread apart the lease portfolio is, and what systems are already in place, Torr estimated it would take three to 18 months to collect the data and establish the electronic depository.

To streamline implementation, he recommended these five strategies:

• Set up diligent governance—such as steering committees, project management teams, and tracking and reporting of progress—to make best use of the potentially vast resources needed to implement changes.
• Assess the changes the new lease accounting standard will bring to the business and customize the implementation plan based on the assessment. For multinational companies, that should include assessing the differences between International Financial Reporting Standards used by subsidiaries and GAAP.
• Maximize the use of technological tools to gather, analyze, and report data in the company’s lease repository and calculate assets and liabilities.
• Prepare and update all stakeholders on the changes to minimize disturbances caused by the implementation. This includes employee training and a communication strategy.
• Establish rigorous processes and internal controls necessary to ensure the lease repository is complete and any lease modifications are tracked and reported.

—Sabine Vollmer (Sabine.Vollmer@aicpa-cima.com) is a JofA senior editor.