Lease adoption work will spill into 2019, poll suggests

A substantial number of public companies preparing to implement new lease accounting rules are likely to continue their adoption work even into the first quarter of 2019, after the Jan. 1 effective date.

That would line up with anecdotal observations that companies continued working to implement new rules on revenue recognition even after that standard took effect Jan. 1, 2018. While it may be ideal to have new accounting processes up and running at the start of the reporting period when they take effect, the most critical deadline companies face is their relevant filing date for first-quarter reports, and experts said many companies used that additional time into early 2018.

A global poll by Deloitte assessing implementation of the new lease accounting standard suggests roughly a third of companies facing the Jan. 1, 2019, effective date expect to continue preparations into the early weeks or months of 2019. While U.S. companies are preparing to adopt Accounting Standards Codification Topic 842 on lease accounting in the United States, companies following International Financial Reporting Standards are also working to adopt new lease rules under IFRS 16 along the same timeline.

With 34 percent reporting they expect to continue implementation activities into the new year, plenty of companies also have no expectation of communicating key performance indicators under the new accounting until well into 2019. The majority of companies in the poll said they will report KPIs reflecting the new rules to the audit committee by the end of 2018, but roughly 20 percent of companies expect to give notice into early 2019. A little less than 30 percent do not expect to report KPIs to investors until early 2019, and closer to 40 percent do not expect to communicate KPIs to rating agencies or regulators until early 2019.

Deloitte acknowledges its global survey was open from November 2017 through March 2018, so those expectations could have changed as the end of the third quarter now approaches. U.S. companies might take comfort to note that companies reporting under IFRS are experiencing many of the same challenges in preparing for the new accounting, such as issues with collecting lease data, gathering a complete population of contracts, coordinating among internal stakeholders, deploying adequate resources to manage the implementation, and implementing the standard while also juggling implementation of new revenue recognition and credit loss rules.

In the United States, new rules on reflecting credit losses take effect for public companies Jan. 1, 2020, but many financial institutions, which are most affected by the new requirements, are well into adoption efforts. The “current expected credit losses,” or CECL model, requires companies to take a more forward-looking approach to signs of risk in their loan portfolios, which will accelerate the recognition of losses. Companies reporting under IFRS adopted similar rules in 2018.