Will More Businesses Implement Lease Accounting Updates in 2017?February 07, 2017
Are you familiar with the pending changes to lease accounting? Certain companies must change the way they report lease obligations starting in 2018.
Editor’s Note: On July 17th, 2019 the FASB proposed delaying effective dates for four key accounting standards (accounting for leases, credit losses, hedging and long duration insurance contracts). Check out our blog, FASB Proposes Delay in Major Accounting Standards for more information.
Beginning in 2017, businesses are expected to increase the amount of time and effort spent on implementing the new Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) lease accounting standards. Though the changes are not effective for public and private companies until 2018 and 2019, if presenting comparative financial statements, recent studies have shown that businesses should undertake the process of understanding the changes and impact to the financial reporting in 2017.
What is a lease?
A lease is a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment (an identified asset) for a period of time in exchange for ‘consideration’ (i.e. a periodic payment). The lessee is the person who holds the lease of a property (in other words, the user of the property) while the lessor is the person who leases the property to another (a landlord, in other words).
Accounting for leases
Under existing U.S. Generally Accepted Accounting Principles (GAAP), companies that lease assets (lessees) must report lease obligations on their balance sheets only when they are similar to financing transactions, such as rent-to-own contracts. If not similar to financing transactions, then only disclosures in the footnotes are required.
Check out our blog, written in February 2016 (when the changes were first introduced) for a detailed description of the changes. To summarize, FASB and IASB issued new lease accounting standards in an effort to disclose more information to investors and be more transparent on balance sheets.
- Companies are required to record all leases as “right-to-use” assets with corresponding liabilities (no distinction between operating and capital leases is made on the balance sheet under the updated guidance)
- Leases with terms less than 12 months may be exempt from being capitalized (to capitalize a lease means to record a lease obligation as an asset on the balance sheet).
The biggest challenges cited by businesses (according to a recent study) in implementing the changes are:
- Pinpointing all leases
- Gathering all necessary lease data in a central, electronic inventory
- Implementing multiple accounting standards changes (revenue recognition, for example)
Strategies for businesses
The standard takes effect January 1st, 2019 for public companies, and one year later for private companies, but this doesn’t mean planning starts a few months before that. Your business should make a concerted effort to make room for these significant changes, sooner rather than later.
A few strategies your business can take advantage of:
- First and foremost, assess the changes the new lease accounting standards will bring to the business- Based on this assessment, your business will be better equipped to draft an implementation plan.
- Update all stakeholders and users of the financial statements on the changes- The implementation could cause disturbances if your stakeholders are not up to speed on what’s changing. Especially if you have debt covenants attached to your financial reporting of your balance sheet.
- Set up system of governance- Implementing the changes will require a lot of resources, so it would benefit your business to set up a steering committee or project management team to keep track of the process and report progress.
- Utilize technological tools- Technology can help gather, analyze and report lease data in an efficient way.
Certain sectors, including automotive, healthcare, and industrial services expect to spend much more time in 2017 working to implement the lease accounting standards updates. Questions? Contact us today.