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Implementation of Lease Accounting Standard to Put Financial Reporting Staffs Under Stress

The FASB’s recent work includes major standards for revenue recognition and lease contracts. In addition, the accounting board plans to publish a major revision to the guidance for writing down bad loans and securities in about a month. The net result is that U.S. companies’ financial reporting staffs find themselves in the unwelcome position of undertaking three major implementation projects on overlapping schedules.

With the February 25, 2016, publication of the FASB’s Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), U.S. companies’ financial reporting staffs find themselves in the unwelcome position of undertaking what is expected to become three major standards implementation projects on overlapping schedules.

ASU No. 2016-02 was released two years after ASU No. 2014-09, Revenue From Contracts With Customers . The revenue standard is scheduled to become effective for publicly traded companies in 2018. The lease standard’s effective date is a year later in 2019.

In addition, the FASB is expected, perhaps as soon as March, to publish another major standard — its amendments to the guidance for writing down bad loans and securities. The board decided in November to also give the loan loss standard a 2019 effective date.

The net result will be a major amount of stress on company controllers, their financial reporting teams, and corporate reporting systems.

“There has been a demand on their resources and their time,” said Kimber Bascom, KPMG LLP’s lease project leader. “Even companies with large populations of leases may not have been as focused, while awaiting the final standard because they’re frankly at capacity in terms of what they can deal with the revenue recognition changes.”

Now that companies are turning attention to the lease guidance, many may start by reviewing their existing contracts and trying to determine which agreements, such as purchases of computer storage via the cloud, qualify as service contracts and are outside the scope of the standard as a result, and which deals are considered lease agreements and considered among the areas of activity covered by the standard.

Bascom said companies will need to get a good grasp of how their contracts line up against the new lease standard’s requirements. The difficulty of that task will depend on the number of contracts they have and their complexity.

Chad Soares, a partner in PricewaterhouseCoopers LLP’s national professional services group, said much of the decision about whether a contract fits within the standard’s scope rests upon the concept of control. Control of the asset covered in the contract, such as a piece of construction equipment, suggests that a lease agreement in place. The purchase of a networked computer service, such as cloud storage, would not appear to involve control in the same way, and would probably fall outside the standard’s scope and mean no recognition on the balance sheet.

Given the variety of agreements that many large businesses enter into, the analysis required by the lease standard is almost guaranteed to be time consuming.

“It’s about all the things that feed into my financial reporting,” Soares said. “What controls do I need ? How do I gather data? What systems aggregate, calculate, and allow me to deal with the aggregation of information, the reporting of information. What we’ve been trying to be very clear with everybody we’re talking to is, ‘You can’t just think about this as something that the finance function has to deal with. This is a broader thing that the organization overall is going to have to think about.’ Companies will have different responses based upon how significant leasing is to what they do.”

According to the FASB, investors and securities analysts will be among the chief beneficiaries of all this extra work once the data moves to the face of the financial statements from the financial statement footnotes.

Sean Torr, a director in Deloitte LLP’s advisory practice, said the transfer of the lease liabilities to the balance sheet should mean the information is more accurate and reliable and give investors a greater degree of confidence in how they value the companies.

The push to move the lease liabilities to the balance sheet began with the SEC’s request to the FASB in 2005 in Report and Recommendations Pursuant to Section 401(c) of the Sarbanes-Oxley Act of 2002 on Arrangements With Off-Balance Sheet Implications, Special Purpose Entities, and Transparency of Filings by Issuers. The report advised the FASB to, among other things, reexamine the accounting for lease contracts because so many companies were using them to avoid reporting exposures to significant liabilities.

An SEC spokesperson emailed a comment from the agency’s chief accountant, James Schnurr, which said, “The FASB’s issuance of the new lease accounting standard is an important milestone that provides transparency about a company’s obligations and will improve financial reporting.”

Now that the standard has been published, companies, if they have not yet made the process of implementing the lease accounting changes a priority, may be forced to look at implementation process with a newfound sense of urgency.

“The release will get people to understand that this really is coming, we now have a deadline,” Soares said.

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