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INSIGHT: Lease Accounting—Public Companies Are Ready, Others See Arduous Path

Nov. 6, 2019, 2:00 PM

The effective date for the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) lease accounting standards passed on January 1, 2019 for U.S. publicly-traded calendar-year companies. But, public company executives’ outlook on compliance work for the standard indicates that many may have ongoing work ahead of them to build long-term, sustainable lease accounting programs. Furthermore, sentiment among private companies and public sector entities, which must also comply with the leasing standards in the coming years, suggests that lessons from public company implementation could go a long way in smoothing implementation for organizations across the market.

Public Companies: Sustainable Reporting Solutions Are the Biggest Pain Point

According to a Summer 2019 poll, only 26.3% of responding public company executives reported that their implementation of the new lease accounting standards is complete, despite most having already disclosed using the new standard in at least one reporting period.

Leading up to the effective date, many public companies reported specific challenges around adoption, including complexities around gathering the data needed to comply and trouble implementing new technology specific to lease accounting, which many incorrectly assumed would be “plug-and-play.” Post-implementation, 29.7% of surveyed public company executives stated that identifying all leases and gathering the necessary data is going to remain their biggest compliance challenge over the next 12 months, signaling that a sizable segment of publicly-listed businesses have yet to finalize a long-term, sustainable solution for reporting under the standards on a quarterly and annual basis.

In practice, compliance approaches that depend on manual processes for individual reporting periods pose risks to organizations.

Public companies are not the only ones struggling with these issues. Private companies and government entities are already reporting challenges in implementing the new lease accounting standards.

Public Sector and Private Company Effective Dates are Coming, but Few Feel Prepared for Compliance

The Governmental Accounting Standards Board (GASB) lease accounting standard for state and local governments, as well as public higher education institutions, is currently effective retrospectively for reporting periods starting after December 15, 2019. That said, GASB has issued an exposure draft proposing to amend the effective date from reporting periods starting after December 15, 2019 to fiscal years starting after December 15, 2019, offering some entities a little more time to comply if approved.

Elsewhere in U.S. government, the Federal Accounting Standards Advisory Board’s (FASAB) lease accounting standard is effective prospectively for federal agencies’ next fiscal year, which start October 1, 2020. Upon initial feedback from federal agencies regarding the complexity and pervasive impact of this statement, the FASAB has approved drafting of an Exposure Draft (ED) to defer the effective date by two years to October 1, 2022. Comments will be sought from the public once such ED is released.

Regardless of when government entities will ultimately need to comply with the new leasing standards, many still have a long road to travel on the implementation journey. Just 11.4% of federal agency employees and 12.4% of state/local government or higher education institution employees feel prepared for compliance according to our poll. Additionally, when asked about the expected effort involved in lease accounting implementation, 41.8% of federal and 40.7% of state/local or higher education professionals polled described it as “difficult.” Identifying leases and gathering data for lease accounting calculations posed the top challenge to public sector organizations’ compliance efforts in the year ahead (24.7% federal agency professionals and 39.9% state/local governments or higher education employees) according to our poll.

The last effective date on the horizon for lease accounting is for private companies. On October 16, 2019, the FASB approved the deferral of the new lease standard; as a result, ASC 842 is effective for non-public business entities for annual periods beginning after December 15, 2020, and interim periods thereafter. Given sentiment among public companies, it is recommended that private organizations still make the most out of their extension rather than slow early efforts or wait until next year to get started. Many are finding the process challenging, as more than half of responding executives at privately held organizations with 100 or more real estate and/or equipment leases in their portfolios currently describe lease accounting implementation as “difficult.”

Regardless of where organizations are in their compliance or implementation timelines, we do not recommend slowing efforts or waiting to get started. While many public companies spent months – if not years – to comply with the new standards, many continue to work on implementation efforts to better streamline lease accounting operations, fix temporary manual processes, or refine technology solutions. Lease portfolios are constantly in flux, so standing-up an organizational infrastructure to comply with lease accounting standards should also include ongoing maintenance. Understanding where an organization is on the adoption curve for the standards can help leaders discern how involved they need to be to help cross the effective date finish line and confidently report under the new standard for future reporting periods.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Jeanne McGovern is a partner and Sean Torr is a managing director at Deloitte & Touche LLP.

The authors would like to thank Deloitte Risk & Financial Advisory partner Jennifer Ahn and Audit & Assurance partner Blake Rodgers, both of Deloitte & Touche LLP, for their input to this article.

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