Early work on new lease rules reveals big effort ahead

Looming large in the sphere of big accounting changes, new requirements to bring leases on to corporate balance sheets are starting to win pockets of attention. That attention is mixed, however, as companies enter the home stretch in adopting even bigger change to the way they recognize revenue in financial statements.

At a national accounting conference in December, the vice president and corporate controller for Comcast sat on a panel to discuss what companies were accomplishing in preparing for the new lease accounting requirements. Those rules take effect in 2019, a year after the 2018 starting date for the new revenue recognition requirements.

“In terms of where we are in adopting the new lease standard, I’d like to tell you where we are in adopting the revenue standard,” said Daniel Murdock, who has since been promoted to senior vice president, chief accounting officer, and controller at Comcast. “We’re busy working on revenue recognition.”

That’s still true for many companies heading into springtime, experts say, although they are beginning to worry about what lies ahead for companies that haven’t yet even taken preliminary steps to prepare for new lease rules. “It’s fair to say the average company still has quite a bit of work to do,” says James Barker, senior consultation partner for leasing at Deloitte & Touche. “People are still very focused on revenue but companies do need to keep their eye on the ball on this one.”

Some companies have taken some significant measures, says Daryl Buck, national managing partner at Grant Thornton. “Some have identified their strategy and their team, and they’ve mapped out how they are going to get to the finish line,” he says. Those tend to be the larger companies with plenty of staffing so they can devote some to revenue recognition and others to the lease standard, he says. “Not everyone has that luxury of having those resources. A lot of companies are using the same people to do both projects.”

Companies definitely are tuned into the topic, says Mike Stevenson, national assurance partner at BDO USA, based on much higher-than-usual traffic to a recent webinar, even when no continuing professional education credit was offered. “The interest is there, but what companies are doing depends,” he says. “Large companies with large lease portfolios are keenly aware of the task that’s ahead. They are asking a lot of questions about not only impacts, but also business process changes and systems changes.”

Still, not every company should be concerned about implementing the leasing standard right away, says Alex Zhang, a partner at audit firm UHY. He poses three questions to companies to quickly gauge their exposure and their readiness to apply the new rules: How familiar are you with the new standard? How many leases do you have? What is your approach to adopting the new standard?

“If you don’t have a lot of leases, it’s not too complicated,” he says. “But if you use a lease strategy in your business, you need to be prepared.”

“In terms of where we are in adopting the new lease standard, I’d like to tell you where we are in adopting the revenue standard. We’re busy working on revenue recognition.”

Daniel Murdock, SVP, Chief Accounting Officer, Controller, Comcast

At audit firm RSM, partner Rich Stuart says he sees folks who are finding the project more difficult than they initially expected. “They weren’t aware of the magnitude of change,” he says. “They didn’t realize the time it was going to take to get all the information into one place. It’s taking more time to adopt, and they’ve got to get more people involved than they originally thought.”

Companies that haven’t done much as yet to adopt the standard may find themselves in a pinch for resources, says Stuart. Larger companies with larger groups of people tend to be the early movers on the leasing standard because they have the staffing. Companies starting early are the first ones reaching out to third-party providers for assistance.

As more companies enter the demand stream, they will find themselves at the back of the line, says Stuart. “If you find yourself a couple months to the effective data and you haven’t started, then you look for resources, you may find yourself in quite a bind,” he says.

In some cases, the companies digging in early are reaching out to industry peers and collaborating on interpretations of the new standard, says Kimber Bascom, a partner at KPMG. While the Financial Accounting Standards Board and the American Institute of Certified Public Accountants formed formal groups and processes for vetting questions and interpretations on revenue recognition, the same mechanism isn’t taking shape for the lease accounting standard.

That has prompted companies to reach out to one another, says Bascom. “They are methodically working through questions they have, trying to get to some consensus, and where they don’t they’re reaching out to FASB or the Securities and Exchange Commission or their auditors to try to work through questions,” he says.

WHAT DOES THE NEW GUIDANCE DO?

Below, FASB discusses the new lease guidance.
Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months.
Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the guidance in the ASU will require both types of leases to be recognized on the balance sheet.
The ASU permits private companies to use risk-free rates when determining the present value of lease liabilities.
The ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements.
As previously indicated, the accounting by organizations that own the assets leased by the lessee—also known as lessor accounting—will remain largely unchanged from current GAAP. However, the ASU contains some targeted improvements that are intended to align lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014.
Source: FASB

Some of the questions surround the very starting point in the standard—defining a lease—so as to understand what arrangements are affected by the new accounting requirements, says Deloitte’s Barker. The new standard provides a slightly different definition of a lease compared with historic interpretation or market understanding of what constitutes a lease, leading to some analysis of arrangements that are not traditionally regarded as leases.

That includes, for instance, service arrangements that include use of assets, so the lease is embedded into a service contract, says Barker. Common examples include service agreements involving medical equipment, or cable plans that include the provision of a cable box. “There are still several of those kinds of things being considered,” says Barker.

Companies also are working through interpretations around how to treat variable payment methods compared with fixed payments, says KPMG’s Bascom, as well as how to carve up contracts that include both lease and non-lease components. In addition, companies are working through how to transition to the new guidance. “The mechanics of transition in some cases are somewhat challenging,” he says.

Sheri Wyatt, a partner at PwC, says the biggest challenge she sees in companies that are preparing is determining exactly what belongs in the lease population and assuring the population is complete. “There’s a need for that extra level of comfort around the completeness of information now that leases are going on the balance sheet,” she says.

The next challenge is assuring the data is complete, she says. Many companies have long used tools like spreadsheets to keep track of leases for asset management purposes, but those tools likely don’t capture the same data now needed to meet the new accounting requirements. “How do I fill those gaps?” she says.

Wyatt is cautioning companies against doing any window shopping for technology solutions before they’ve done a thorough assessment of their needs. “I’ve seen a few cases where companies evaluate system solutions but then are not able to make a decision because they hadn’t gone through an assessment of their current state,” she says. “You need that gap assessment to understand what your business requirements are.”