The Securities and Exchange Commission is hearing concerns that companies are still having trouble getting IT systems in place that can put leases on corporate balance sheets as required in 2019.
Kevin Vaughn, senior associate chief accountant at the SEC, said problems with systems are perhaps the most significant challenge companies are facing in their race to comply with Accounting Standards Codification 842, which requires public companies to reflect leased assets and liabilities on the face of financial statements effective Jan. 1, 2019. “What we’ve heard, especially most recently, is there just are not lease systems out there that can do what we need them to do and really track all these leases,” he said.
Acknowledging systems providers are “working diligently” to turn out updates to software that companies need, Vaughn said many companies need customized solutions to both manage their leases and to perform the accounting functions necessary to comply with the accounting requirements. Companies appear to be devoting the resources necessary to achieve those solutions, he says. However, “building that out certainly is taking time.”
The SEC is hearing companies say they can meet the deadline to comply by the beginning of 2019, but they will need to use manual processes to do so, while automated solutions continue to develop to facilitate compliance with ASC 842, Vaughn said.
Larry Smith, senior managing director at FTI Consulting and a former member of the Financial Accounting Standards Board, which wrote the new accounting rules, says he’s also hearing companies most vexed by simply identifying all their leases, especially those that may be embedded in service contracts. “I’d say identification of leases is probably the single most difficult thing facing companies,” he said.
The new standard requires companies to bring onto the balance sheet not only contracts that are explicit lease arrangements, but also leases that may be contained in service contracts. Those are instances where companies may have control over certain assets as a result of various types of service contracts—like cable or satellite services that include hardware, advertising arrangements that give control over billboards, or cloud computing arrangements that include servers.
It’s important for companies to identify those leases, said Smith, but they need to be careful in doing so. “Effectively, you have to have control over an item, and it’s not physical control, it’s operational control,” he said. “You need to be careful when trying to identify why with one fact pattern it was in fact a lease and in another fact pattern it was not a lease.”
To the extent companies may be struggling with specific aspects of the standard, especially system readiness, Vaughn said, it’s important for companies to persist. “Keep going,” he said. “A lot of the work that needs to be done is outside the system,” like collecting information and data, arriving at judgments, and forming accounting policies.