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Oil Industry Trade Group Asks for Delay of Lease Accounting Standard

An oil and gas industry trade group has asked the FASB for two additional years to comply with the board’s lease accounting overhaul, which goes into effect for public companies in 2019. The group said the amount of work involved in tallying lease obligations is more onerous than expected, and accounting software solutions for the standard do not yet exist.

Calling the FASB’s lease accounting overhaul a “dramatic” change that calls for more complex and time-consuming analysis than businesses anticipated, a group representing the oil and gas industry has asked the accounting board for more time to comply with it.

Instead of requiring public companies to follow Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) in 2019, the FASB should give companies until 2021, with the option to apply the new rules early, the American Petroleum Institute (API) asked the board in a July 11, 2017, letter.

“The dramatic change in accounting versus current GAAP, the lack of software available to handle the variations and complexities of lease portfolios, and the effort required for companies to plan and implement the changes in a well controlled manner together pose serious obstacles to a broadly effective implementation for U.S. preparers,” API wrote.

The FASB said the board would consider the group’s request but made no commitment.

“We are evaluating the letter and plan to continue outreach to understand the stakeholder’s concerns,” a FASB spokesperson said.

The FASB published ASU No. 2016-02 in February 2016 after years of debate about whether and how companies should report the liabilities associated with renting stores, vehicles, airplanes, heavy equipment, and other leased assets on their balance sheets. Critics for years have said that an airline that rents a fleet of jets, for example, has just as many financial obligations as one that takes out loans to buy them.

FASB ASC 840, Leases , the standard that is being phased out by the guidance in ASU No. 2016-02, says companies only have to record lease obligations on their balance sheets when the arrangements are akin to financing transactions, such as rent-to-own contracts for buildings or vehicles. Few get recorded, however, because of what critics call “bright lines” in U.S. GAAP that give the companies room to arrange deals to look like simple rentals. If an obligation is not recorded on a balance sheet, it makes a business look like it is less leveraged than it really is.

API said the problem with implementing the new standard was not necessarily with the high-dollar lease contracts but the numerous small-dollar rental arrangements that need to be evaluated.

“Member companies currently estimate that the number of assets falling in scope of the ASU range from 1000 to 30,000, excluding easements and right-of-way agreements which can number up to 100,000 for an individual company,” API wrote.

Furthermore, software to help companies enter this data is not available yet, the organization wrote.

“Quite simply, some 18 months before the effective date of one of the most extensive accounting changes in the last two decades, the software and related support required for effective implementation does not yet exist,” API wrote.

Many businesses lag behind where they need to be to follow the new lease accounting standard, a June 27 survey of large public companies by Ernst & Young LLP showed. Of the companies surveyed, 27 percent believed they were on track to meet milestones to comply with the new rules. Many cited difficulty collecting data or not having enough manpower to devote to the task.

For in-depth analysis of the FASB’s standard for lease accounting, please see Catalyst: US GAAP — Leases, also on Checkpoint.

Additional analysis of the lease standard can be found at Accounting and Auditing Update Service [AAUS] No. 2016-15 and SEC Accounting and Reporting Update Service [SARU] No. 2016-13 (March 2016): Special Report: Accounting for Leases—An Explanation and Analysis of Accounting Standards Update No. 2016-02.