The lease accounting standard is about to get easier for companies to adopt when it takes effect Jan. 1, 2019, but that doesn’t mean companies should slow their adoption preparations.
The Financial Accounting Standards Board has decided it will issue a proposed update to accounting standards that would provide some optional transition relief for companies as they prepare to adopt the new requirements to bring virtually all leases on to corporate balance sheets.
The simplification will allow companies to apply the new lease accounting requirements on a go-forward basis from the date of adoption. That means companies will not have to apply the new rules to prior periods in financial statements, leaving those obligations reflected under current rules.
The FASB also decided to propose some additional transition relief — to lessors only — with respect to their adoption of the standard as well. The board proposes lessors should not be required to provide comparative period financial statements under the new lease accounting rules.
In addition, the board plans to propose a practical expedient that would allow lessors to not separate lease components from nonlease components if certain conditions are met. The provision could be elected by class of underlying assets. If elected, companies would have to meet some separate disclosure requirements.
The board also plans to proceed with plans to simplify the transition for existing land easements, applying the rules only to new land easements going forward.
“This is big relief for companies,” says Sean Torr, managing director with Deloitte & Touche. Companies are facing big challenges in preparing for the standards based in part on the availability of information technology solutions, he says.
Facing a Jan. 1, 2019, effective date for the new lease accounting requirements, which will bring virtually all leased assets on to corporate balance sheets, public companies ideally would be running parallel systems on 2017 lease obligations to prepare that data for historic periods in financial statements at the adoption date. Yet companies have had difficulties getting technology solutions up and running and in dealing with foreign exchange rates, says Torr.
“This new rule basically will look at only those contracts in existence at the effective date and accounting for those contracts under the new rule at that point in time,” says Torr. The transition relief will not require any extraordinary transition disclosures to explain prior periods, as companies will simply continue to present the footnote disclosures on prior periods as they are presented in financial statements today, he says.
“There’s still a tremendous amount of work that has to be done by companies, irrespective of this transition relief, over the next 13 months to be ready for this standard,” says Torr. “This is certainly not a reason to stop or pause the readiness activities.”