Companies still have a long way to go to be ready for new lease accounting rules that take effect in 2019, according to a recent KPMG poll.
In a blind, third-party survey of 150 companies, KPMG found only 15 percent of companies had completed their work to prepare for the new accounting standard that brings virtually all leased assets and related liabilities onto the face of corporate financial statements. Nearly half, or 45 percent, said they had implementation plans under way.
Another 19 percent of entities said they were in the process of planning their implementation activities, while 16 percent were still assessing how they will be affected by the new accounting requirements, so had not yet done any work to begin implementation. A final 5 percent said they had not yet taken up any work to assess how their financial statements will be affected, let alone any implementation planning or activity.
KPMG says the results suggest companies are “moving quickly,” yet “aren’t where they need to be” to achieve compliance by 2019 as required by the standard.
Companies in the United States will soon begin filing first-quarter 2018 financial statements reflecting their implementation of even bigger new rules on revenue recognition. That standard was issued by the Financial Accounting Standards in 2014, giving companies literally years rather than months to prepare. Yet experts and regulators observed companies generally delayed their implementation efforts, eventually creating a push to get systems and controls ready for the transition.
When the FASB finalized new rules for lease accounting, which bring leases out of footnotes and onto the balance sheet for the first time, it intentionally set an even more distant effective date so companies would not be adopting both major new rules simultaneously. The GAAP rule takes effect for calendar-year companies on Jan. 1, 2019, while a similar standard takes effect under International Financial Reporting Standards at the same time.
Then FASB decided to extend companies some massive relief by permitting adoption of the new rules prospectively, which means they will not be required to present historic periods in financial statements reflecting the new on-balance-sheet presentation. The board has issued a proposed update to accounting standards and is expected to finalize the guidance soon.
Separately, the board recently approved another practical expedient for certain leases involving land easements, or rights of way. Companies found during implementation that the new standard would apply to many contractual arrangements that historically had not been treated as leases, which would make it difficult to identify and bring those obligations into financial statements for historic periods. FASB approved an accounting standards update that allows companies to account for such arrangements only on a go-forward basis.