In accounting software provider LeaseQuery’s first benchmarking analysis of lease liabilities, it found balance sheet liabilities increased nearly 16 times as operating leases came onto the balance sheet for the first time upon adoption of ASC 842, Leases.
The standard requires recognition of a right-of-use asset and a corresponding lease liability at lease commencement. Private companies will have to comply with ASC 842 by the end of this year.
LeaseQuery’s “Lease Liabilities Index” is an analysis of more than 400 nonprofit, public, and private companies’ financial statements pre- and post-ASC 842. It is designed as a resource to help companies assess and communicate lease accounting changes.
Here are some key findings:
Industry impact: The new standard has the most impact on sectors with high volumes of leases. The index found financial institutions, healthcare, restaurants, energy, retail, and manufacturing will be the industries with the biggest balance sheet changes, with increases in their average lease liabilities ranging from 495 percent for manufacturing to a staggering 6,070 percent for financial institutions.
Importance of communication: Although significant balance sheet changes will raise questions from financial statement users and investors, increased transparency is an intended goal of lease accounting changes. Companies will be challenged to communicate the financial impact of the accounting change to their stakeholders. In addition, there may be other results of implementation that can be shared, including the value of looking at lease data a different way that may improve business operations overall, such as the strategy of using leases for capital investment, reassessing lease versus buy decisions, and identifying existing lease contracts that could be modified.
Avoiding common pitfalls: Private companies that have not yet adopted ASC 842 should learn from the public companies that already have. The Index shows only 37 percent of private companies and nonprofits in early stages thought it would be a difficult transition, but 67 percent in the later stages reported experiencing difficulty. It is advisable to start early to develop a transition plan, because it could take a year before the adoption date. Early phases of the plan should include understanding the guidance, reviewing and inventorying existing lease agreements, and identifying software providers. The plan should include a post-adoption strategy for new accounting and reporting requirements, monitoring changes in the lease portfolio, and ongoing communications.
ASC 842 has been called one of the biggest accounting changes in decades, and the Index reports it is one of the biggest changes to balance sheets in decades. Compliance will not come easily, and companies that have not yet made the change need to prepare themselves.