Three new surveys underscore the progress many companies are making on preparing for the fundamental changes in lease accounting that will take effect for public companies at the beginning of next year. These surveys also indicate, however, that a significant minority of companies could miss the deadline.
As described in the February-March 2016 Update, the Financial Accounting Standards Board has adopted new standards governing financial reporting for leasing activities. ASU No. 2016-02, Leases (Topic 842) will require financial statement recognition of assets and liabilities for leases with terms of more than 12 months. The new standards will affect the financial statements of most companies that engage in significant leasing, whether as lessees or lessors. For public companies, the new leasing ASU will take effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For other organizations, it is effective for fiscal years beginning after December 15, 2019, and for interim periods beginning after December 15, 2020. See December 2015 Update.
Because of the widespread use of leases, the new standards potentially impact almost all companies to some degree. The standards are intended to increasing transparency and comparability with respect to leasing, but implementation will have far-reaching implications, including for internal controls and IT.
KPMG retained a third party to survey 150 companies concerning their progress. Survey participants “included finance and accounting professionals in financial services, manufacturing, retail, telecom, and media industries.” More than half had annual revenue between $500 million and $50 billion. The KPMG survey found:
- Fifteen percent of respondents have completed implementation.
- Implementation is in process at 45 percent.
- Nineteen 19 percent are still in the “planning phase.”
- Sixteen percent are “assessing the impact” of the new standard.
- Five percent have not started transition.
Prior KPMG survey results on leasing accounting progress are discussed in KPMG Sounds the Alarm on Revenue Recognition and Leasing Accounting Implementation, August 2016 Update.
In January, Deloitte & Touche surveyed 3,890 professional who participated in a webcast on lease accounting implementation. This survey is similar to online polls conducted in 2016 and 2017 (see New Lease Accounting Implementation May be Challenging, June-July 2016 Update). Lease accounting implementation enters the final stretch, which reports the results of Deloitte’s most recent poll, indicates that over 21 percent of respondents said that their companies were either “extremely” or “very” prepared for the new standard. The comparable percentage was only 9.8 percent in early 2016. However, 18.2 percent responded that they were either “not too prepared” or “not prepared at all.”
Consistent with other surveys, Deloitte’s respondents confirmed that gathering data on existing leases was their biggest problem. Almost one third thought that “collecting necessary data on all organizational leases in a centralized, electronic inventory” was the largest implementation challenge. Apparently, however, convincing senior management that implementing the new leasing standards will be a major project is not generally a problem: Only 3.6 percent thought the largest challenge would be “overcoming board and executive assumptions that implementation will have little or no impact on financial reporting and operations.”
LeaseAccelerator, a lease accounting software provider, also conducted its survey in January 2018. Respondents were “over 300 senior leaders from finance and accounting organizations at large private and public companies.” Most came from companies with more than $1 billion in annual revenues. Approximately 40 percent of the survey companies had fewer than 500 leases, while roughly 13 percent had more than 5,000. LeaseAccelerator’s prior survey of the state of implementation was described in LeaseAccelerator Finds that Leasing Standard Implementation is Accelerating, March 2017 Update.
Some highlights of Lease Accounting: A 2018 Progress Report, LeaseAccelerator’s survey findings, include:
- “The good news is that the industry appears to be largely on track with their lease accounting projects. We will likely avoid what many were worried might turn into “leasepocalypse” at year end.” Six percent of respondents said that implementation was completed, while about 8 percent said they were ahead of schedule. Roughly 55 percent indicated that their implementation was on schedule. Slightly over 20 percent of companies responded that they were behind schedule, and a little over 10 percent had not started implementation.
- The majority of companies would like an extension. Approximately 60 percent of companies think that FASB should extend the compliance date. LeaseAccelerator observes that “the desire for additional time is not solely driven by the complexity of the ASC 842 [leasing] standard, but rather the combined work effort required to comply with both the new leasing and revenue recognition standards in such close proximity.”
- Implementing the new leasing standard rivals the transition to the new revenue recognition requirements. Seventy-five percent of respondents said that the new leasing standard was “just as complex or more challenging” than revenue recognition.
- The hard part is not the accounting, but the data-gathering. Half of respondents said that “finding and collecting the necessary data” was the greatest difficulty; other problems cited were “modifying business processes, policies, and controls; upgrading software applications; and project managing the overall work effort.” Over half of companies have taken an inventory of their lease portfolios, and 30 percent are “more than half way done” with data collection.
- The hunt for embedded leases. “Accounting organizations are finding embedded leases contained in service agreements with contract manufacturing, third party logistics, and data center outsourcing vendors to be the most challenging to find and analyze. Non-real estate leases such as IT, fleet, material handling, rail car, transportation, and other equipment leases are also proving challenging to find and analyze.”
- Lease accounting software is replacing spread-sheets. More than one third of companies have selected a software vendor to support the new lease accounting standards, in most cases replacing “the historically-used, spreadsheet-based accounting approach” to tracking leases.
- The accounting staff leads the way. About 80 percent of companies “have assigned a formal project manager from the accounting or financial reporting team to lead the initiative, which for many companies will be one of the largest accounting change initiatives in the past 50 years.” Less than 30 percent of survey respondents plan to retain external consultants.
Comment: Audit committees should be monitoring monitor the company’s progress on leasing standard implementation in order to avoid last-minute surprises. As SEC Chief Accountant Wes Bricker has pointed out, implementation of the new leasing standard is one of the major accounting oversight challenges audit committees currently face. See SEC Chief Accountant on Advancing the Role and Effectiveness of Audit Committees, March 2017 Update. Companies that engage in any significant amount of leasing should already be nearly done with their implementation effort. For those companies that are farther behind, the June-July 2016 Update sets out a series of “early steps” recommended by Deloitte & Touche to evaluate the implications of the leasing standard.