Lease accounting tips for public and private companies

By Ken Tysiac

Many public companies are not finished implementing FASB’s new lease accounting standard, and one-third of private companies say they are unprepared to comply with the new standard, according to a new survey.

After filing earnings reports for the first quarter of 2019, 25% of public companies plan to spend just as much time implementing the lease accounting standard as they did in the first quarter — and an additional 24% of companies plan to spend more time now than they did in the first quarter, a Deloitte poll released Monday shows.

Meanwhile, just 30% of private companies participating in the poll said they plan to adopt on schedule in 2020. Public and private companies alike have found it difficult to locate all their lease contracts, identify embedded leases in other contracts, and extract the data needed to comply with FASB’s rules.

“There are consequences that people maybe didn’t foresee when this was first released,” said Sean Torr, CPA, risk and financial advisory managing director with Deloitte & Touche LLP.

Public companies have found that their implementation work isn’t nearly finished even though they were required to implement the standard in the first quarter of this year. After meeting their initial deadline, many public companies have turned their focus to:

  • Automating. While 53% of public companies in the survey reported using lease accounting software, Torr said many times manual processes surrounded the software system. Manual integrations and interfaces with existing systems now are being automated. “Now that the first deadline is behind us, companies are looking forward to further automating some of those aspects and streamlining those processes,” he said.
  • Transitioning to company personnel. Many companies used third parties to help them capture their initial data for the lease accounting implementation but plan on using their own personnel for lease accounting in the future. “A key component of that is ensuring that the personnel understand the technology and how to fully operationalize the technology as well as fully appreciate the nuances to [the standard],” Torr said. “So I think making sure that there is appropriate change management and training around the users of the system is a key aspect here.”
  • Creating repeatable processes. Since the standard was issued, public companies have been focusing heavily on gathering the data to comply. Now they are developing processes for estimating incremental borrowing rates in the future. “That may involve continuing to use a third party to do that, or that may be something that could be brought into their own house and treasury functions,” said Jeanne McGovern, CPA, an audit and assurance partner with Deloitte. Companies also will be developing processes for identifying embedded leases in new contracts that are signed in the future.

When the implementation challenges are met, Torr said, public companies begin to look at opportunities to use the new data they have uncovered to consider new strategies.

“There is so much new data that companies haven’t had in the past,” he said. “Some of the companies that we’ve spoken to are thinking about how you leverage that data moving forward for their economic decisions, as an example, lease versus buy.”

Meanwhile, private companies attempting to meet their deadline can learn from public companies, Torr said. He said there is time left for private companies to prepare in a measured and prudent approach.

“The key, and this is a lesson learned from the [public companies], is that more time to vet out the requirements upfront and think through the selection on the technology perspective in a thoughtful way can help the company get the right solution in place and also do it in a cost-efficient way,” Torr said.

Implementation tips for private companies include:

  • Get organized. “They need a really detailed and focused project plan to get from where they are today to their first reporting timeline,” McGovern said.
  • Gather your inventory. “I would be focusing very quickly on identifying and inventorying my lease contracts, both the ones that are clearly leases because they say that in their title as well as those that are contained in other contracts,” McGovern said.
  • Develop a detailed data plan. Torr said data need to be captured in the right format to enter into the system. “What’s challenging is when you have to go back and re-look at contracts and fill in data again the second time around,” he said. “It becomes very inefficient. Developing that very detailed data plan would be a significant component of the road map.”

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.

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