As summer slips away, the countdown to new lease accounting is causing some public companies to shift gears, concerned they can’t make the deadline following their original adoption plans.
“Companies are struggling to be ready on time,” says James Barker, senior consultation partner at Deloitte & Touche. “We’re hearing some companies have effectively given up on a systems solution to adopting the standard. There’s too much remaining to be done.”
Companies are in a race to adopt Accounting Standards Codification Topic 842 by the Jan. 1, 2019, effective date for calendar-year public companies. ASC 842 requires companies to bring their lease obligations out of footnotes and onto the face of the balance sheet for the first time. It also redefines what constitutes a lease in some respects, which has made it challenging for companies to identify and inventory their leases, then abstract and process the necessary data.
Availability of information technology systems necessary to comply with the standard, not to mention the human resources necessary to implement them, has been a challenge throughout the lease adoption process. Now companies appear to be giving up on the notion of having a fully automated system in place for “day one” accounting, opting for manual processes to get them over the hump, says Barker.
“Some companies are using manual processes or workarounds looking to eventually implement a systems solution after they’ve adopted the new standard and reflected the new lease accounting rules in financial statements,” says Barker. “That’s not a great place to be.”
Deloitte’s recent poll on adoption of the new lease accounting rules suggests companies are getting more nervous about whether they can complete the necessary work on time, says Sean Torr, managing director at Deloitte. As of April, 30 percent of 2,170 executives said they didn’t feel prepared to comply on time, and that percentage doubled from a poll only a few months earlier. Half of the respondents said they were either very or somewhat concerned about implementing on time.
“The increase in concern is driven primarily by challenges from a technology perspective,” says Torr. “There’s a lot more complexity here that people did not expect. Having technology interfacing into a company’s existing processes and systems is very challenging because of the high volume of transaction activity that is occurring. It’s taking a lot longer to get ready for the longer-term steady state solution.”
Manual solutions come in many different forms, says Torr, depending on a given company’s situation. “It is those solutions that can be implemented in a shorter window of time, not as deeply interfacing into existing systems,” he says. “It comes down to the volume of leases.”
“The increase in concern is driven primarily by challenges from a technology perspective.There’s a lot more complexity here that people did not expect. Having technology interfacing into a company’s existing processes and systems is very challenging because of the high volume of transaction activity that is occurring. It’s taking a lot longer to get ready for the longer-term steady state solution.”
Sean Torr, Managing Director, Deloitte
The trend is not unlike what many companies experienced in adopting revenue recognition a year earlier, says Torr. The downside of turning to manual processes is the reckoning companies will face later when they must reconcile to more automated systems in the future. It could be a year or even two for some companies to achieve full automation, says Barker, depending on how a given company’s system evolves.
At least part of the current tension stems from adopting the new revenue recognition standard last year, says Marybeth Shamrock, a partner at KPMG. Although that standard was effective Jan. 1, 2018, many companies continued adoption activity well into the first quarter. “Some companies are delayed because they got behind on revenue recognition,” she says. “Depending on how many leases you have, there’s a lot of work to implementing the leases standard. It is very much a heavy lift.”
KPMG’s recent survey also suggests companies are starting to scramble. Companies are finding the process is taking longer than they expected, says Shamrock, as they struggle to identify their leases, especially lease obligations that may be embedded in service or other types of contracts, and as they gather data on leases and transition to new software.
The availability and readiness of technology is an issue, says Shamrock, although some solutions are readier than others. “Some vendors are playing catchup,” she says. “The software is getting there.”
Companies that are heavy in real estate leases are probably a little further along than those that have a heavier portfolio of equipment leases, says Shamrock. “A lot of companies have a central repository for their real estate leases,” she says. “It’s the equipment leases that are all over the place.”
Hal Hunt, a partner at CBIZ, says he sees companies still struggling to identify their lease obligations based on new criteria for what constitutes a lease. “The definition of lease term, what are the lease payments, whether it’s fixed or in-substance fixed or variable—there’s a lot of judgment involved,” he says. “It can be tedious, and you may need input from your landlord or other support to break the tie on some of the problems that are coming up.”
Despite the challenges, companies are on it, says Chris Wright, global leader of business performance solutions at consulting firm Protiviti. “All are making what I would describe as steady, deliberate progress,” he says. He sees a fair number of companies that are “able to get by with very little change,” he says.
As long as companies follow a sound process and pursue the work diligently, they should be able to get the job done, says Wright. “The scoping questions are fairly straightforward,” he says. “How many leases do you have? And how do you know that’s how many leases you have?”
In Wright’s view, there is a “sufficient spectrum of available systems” that companies should be able to find and deploy technology that meets their needs. “Where you have done the upfront work to understand your inventory, and also have a good understanding of what you hope to get out of a system, there are no wrong answers,” he says.