Skip to content

As Clock Ticks Toward Leases Effective Date, Companies Scramble to Comply

Thomson Reuters Tax & Accounting  

· 5 minute read

Thomson Reuters Tax & Accounting  

· 5 minute read

As the 2019 deadline for public companies to comply with the FASB’s lease accounting standard creeps closer, public companies are racing to the finish line. The amount of data required to follow the standard has meant a heavy workload for businesses.

With about a month to go until public companies must comply with the FASB’s sweeping new lease accounting standard, businesses are ramping up their efforts to meet the first quarter filing deadline.

Many have much work to do.

A recent PricewaterhouseCoopers LLP survey of public companies showed 75 percent of polled businesses were at the halfway mark to implementing the new standard with just 4 percent finished with the job.

But PwC partner Sheri Wyatt said she is not panicking, nor should most companies. While the FASB’s lease accounting standard, published in February 2016 as Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), requires businesses to weed through reams of rental arrangements to determine how to report leasing costs on their balance sheets, it poses fewer complex accounting questions than other major accounting standards.

“Leasing is different in the sense that it’s less technical and more operational,” Wyatt said.

It still requires heavy lifting, however, especially this late in the implementation phase; public companies must start complying with the standard in 2019.

Businesses and auditors have repeatedly expressed surprise at the amount of work the new standard involves. Because leasing is such a pervasive practice — businesses can rent anything from photocopiers to forklifts — companies implementing the standard had to start with a long to-do list. For multinational companies, tracking down leasing agreements has been an especially daunting task, as not all paperwork is kept in a single place, nor are all lease arrangements labeled as leases. Financial reporting professionals have relayed that identifying big-ticket leases like those for real estate and vehicles has been a relatively simple task, but finding rental arrangements for things like backhoes or breakroom vending machines has proven to be a bigger undertaking.

In addition, companies have to evaluate other types of arrangements to ensure they accounted for so-called embedded leases — rental arrangements within a service contract, such as when a company advertises on a billboard. At first blush, the deal could look like an advertising contract, but the right to use the billboard could qualify as a lease arrangement under ASU No. 2016-02, according a to briefing paper from Deloitte & Touche LLP.

“All kinds of things come out of the woodwork — the potted plants, the coffee machines,” Wyatt said.

Not all of these need to be accounted for under the new standard, however.

“It really comes down to taking a step back and saying, ‘Yes, technically, those could be embedded leases, but practically, is that going to ever rise to the level of being material?'” she said. “It’s a good thing, though, that companies go through the brainstorming process.”

After the brainstorming, companies then have to go through the work of putting all the data into a process to capture the proper assets and liabilities as required under the new standard. The majority of companies need automated solutions to do so. As the clock ticks to year-end, companies not already deep in the implementation process will have to apply the standard manually, said Michael Keeler, CEO of LeaseAccelerator, Inc., a lease accounting software provider.

“Don’t believe anybody who tells you they can get you there on time starting now,” Keeler said. “That just means they don’t know what they’re talking about, or they do and they’re trying to be slick. These projects are too important, too intense, too operationally complex to do in a month.”

Keeler’s company is getting requests for help, even at this late stage.

“Yes, we can help them, but not by the deadline,” Keeler siad. “They’re doing a lot of manual work arounds to get through day one.”

The FASB has been tackling controversies about lease accounting for almost its entire history. The board in 1976 issued SFAS No. 13, Leases , (FASB ASC 840), which called on companies to record lease obligations on their balance sheets only when the arrangements are akin to financing transactions. Few actually got recorded because of the rules in the standard that allowed most companies to structure deals to look like simple rentals. When a financial obligation is not recorded on the balance sheet, it makes a business look like it has more cash on hand than it really does. Critics — including the SEC — asked the FASB to make lease obligations more transparent.

Businesses threw up significant roadblocks. They fretted about the implications of recording leases on their balance sheets, with some major lobbying groups saying such a change could upend the economy. After more than a decade of debate and a failed attempt at converging U.S. GAAP with IFRS, the FASB ultimately published ASU No. 2016-02. The standard requires almost all leases over 12 months to be recorded on company balance sheets, but in a move that acquiesced many business groups, the new standard does not significantly change how companies recognize the effects of leases in their income statements.

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

More answers