By Rob Lenihan at CFO.com on December 3, 2018
In February 2016, the Financial Accounting Standards Board issued new rules on lease accounting that will move most operating leases onto a company’s balance sheet. Currently, only capital leases are required to be recognized on the balance sheet. Public entities are required to adopt the new leases standard for reporting periods beginning after December 15, 2018; nonpublic entities have an extra year to adopt.
Both public and private companies have been working the past two years to come up with a clear plan to meet all the requirements of Accounting Standards Update No. 2016-02, Leases (Topic 842). While many have plans in place, implementation is another matter. Some organizations are still well short of full compliance.
The change in lease accounting comes on the heels of the revenue recognition standard implemented in 2017. Christopher Wright, global leader of business performance improvement at Protiviti, says the effort needed differs from that needed to comply with the new revenue recognition rules.
Lease accounting is much more a joint effort between information technology and accounting departments, Wright says. “For example, the companies with large lease portfolios see this as an opportunity to automate not just the accounting, but in some cases the data flow and the management information they use for their real estate portfolios.”
Not only are organizations getting their heads around how the new standard works, they are evaluating new IT tools, says James Barker, a senior consultation partner with Deloitte.
But there’s little room for a shoddy compliance effort. “The risk of getting lease accounting wrong is substantial and involves higher post-implementation costs and a loss of stakeholder confidence,” according to KPMG.
What are companies facing on the IT front? Lease management systems have multiplied since the new lease accounting guidance was released. To avoid becoming overwhelmed, some companies are considering only vendors that offer end-to-end lease management, accounting, and standardized reporting. Others are considering third-party tools that offer more limited functionality.
Joseph Brown, national managing partner of strategic federal tax services and ASC 842 advisory services at Grant Thornton, says that many enterprise resource planning (ERP) systems are still under development and not yet in compliance.