Roughly half of public companies expect to spend as much time—or even more—working on lease accounting adoption after the first quarter as they have leading up to their first reporting under the new standard.
That’s the finding of a recent Deloitte Webcast poll, where roughly one-quarter of more than 950 participants said they expect to spend the same amount of time and effort on lease implementation activities after they file their first quarter reports, and nearly as many said they plan to spend even more time. As of mid-February, when the Webcast occurred, 61 percent of participants said their organizations were prepared for the effective date and 31 percent said they were somewhat prepared, while 7 percent said they felt unprepared.
Accounting Standards Codification Topic 842 requires companies to begin reporting virtually all of their lease-related assets and liabilities in their financial statements beginning Jan. 1, 2019, for calendar-year public companies. While historic standards long required companies to track leases and report most of them in footnotes, companies have faced significant difficulties gathering all of their lease contracts and implementing appropriate software or hardware solutions to begin reporting lease obligations in financial statements.
As of Deloitte’s polling date, 53 percent of companies said they were working toward compliance using a software system specific to the new lease accounting rules while 31 percent said they were relying on some combination of existing software and manual solutions to produce their first reports, Another 13 percent said they didn’t know, they were still trying to determine the method, or they were reassessing their technology plans because their first approach did not work.
Typically, companies can expect their level of implementation effort to trail off after their first reporting under a new accounting standard, said Sean Torr, managing director at Deloitte, in a statement. “Whether public companies need to better streamline lease accounting operations, fix temporary manual processes or refine technology solutions, there remains a lot of work ahead for many public companies,” he said.
PwC recently issued an alert indicating it sees similar conditions in the marketplace as calendar-year public companies begin to close the books on their first quarter. “Many public companies are still working to design effective controls or to optimize—and in some cases, replace—the enterprise lease accounting systems they selected,” PwC says. “There is also an evolving understanding that the accounting and controls needed to meet the deadline may not suffice for compliance going forward.”
Some companies are finding, for example, that the systems they selected for implementation are unable to produce all the accounting entries they need or may lack some necessary functionality with respect to disclosures or management reporting, PwC says. Some companies may not have had adequate time to integrate their enterprise lease accounting system with their accounts payable system, or they may be working with a system that still requires system patches and updates.