A pair of new poll results suggest anxiety is growing at public companies that have five months remaining until new lease accounting rules take effect.
KPMG and Deloitte revealed surveys indicating companies are still struggling with adoption of the new leasing accounting rule, Accounting Standards Codification Topic 842, and are getting more concerned about their ability to get done on time. Bringing nearly all leased assets and liabilities on to corporate balance sheets, ASC 842 takes effect for calendar-year public companies on Jan. 1, 2019.
Only 40 percent of nearly 400 respondents to KPMG’s survey indicated they had performed an inventory of their leases, and only a little more than half had worked out what lease accounting software they would use to comply with the new standard. Three-fourths of KPMG’s survey sample represent private companies, which have a full additional year to comply with the new accounting.
One-third of KPMG’s respondents said their biggest implementation challenge is identifying embedded leases, or leases that are contained in other types of contracts, like service agreements. Close behind, companies are reporting difficulties with abstracting lease terms from contracts and entering them into a lease management or accounting system of some kind, not to mention integrating a lease accounting system into an existing system.
Deloitte’s survey of more than 2,170 executives suggests confidence in the lease adoption process is slipping. Nearly one-third of those executives said they feel unprepared to comply, nearly double the number that said they feel prepared.
The gap between those figures has grown since Deloitte completed the same poll in January, where more said they were prepared and fewer said they were unprepared. Roughly half of Deloitte’s survey respondents said they are either very or somewhat concerned about whether the company will implement the new standard on time.
“We’re five months from the mandatory adoption date for public companies, and the polling data is not favorable in terms of the confidence in being ready,” says James Baker, a senior consultation partner at Deloitte. “The trends are not great, and they’re not improving. If anything, they’re going in the wrong direction, ever so slightly.”
Marybeth Shamrock, a partner at KPMG, says many companies delayed work on lease accounting implementation as they focused last year on revenue recognition, and even bigger project in many organizations to adopt rules that took effect at the beginning of 2018. There’s still time to adopt lease accounting, she says, but it’s running short. “All companies, if they haven’t started, need to start immediately,” she says. “At least do the assessment and start thinking about technology quickly. Get those done before Labor Day, before summer ends.”