Posted on 09/05/2017
According to a report issued by EY1, only 27% of finance and IT executives feel confident about meeting the critical milestones to comply with the FASB/IASB lease accounting changes. More than half of the respondents (63%) noted that these changes are a real opportunity to deliver transformation.
Compliance is top-of-mind for executives. Also top-of-mind is a complete review of the operational approach and methodologies that will ensure a smooth transition to the new standards. A significant part of the delay in this effort is the sheer amount of data that must be collected and reconciled. For example, separating lease and non-lease components is a big impact of the new standard.
A recent report issued by Grant Thornton2 stated: “Retailers or wholesalers that lease space over various locations under contracts that have been classified as operating leases will have to bring them onto their balance sheets. In addition, companies in equipment-intensive industries — such as healthcare, transportation or construction — could have thousands of agreements to evaluate, particularly if there are service components embedded in those agreements.”
The time and effort to collect these leases is demanding, so it must be tackled one step at a time. To begin accounting under the new standard, step one is to identify, collect, and load your leases.
Accounting for Fleet Leases (and More)
For example, a retailer may have to sort through rental agreements for thousands of leased forklifts and, separately, the rented batteries for each forklift. Many retail stores pipe in music for customers as they shop and the rental for speakers or satellite receivers can represent a leased asset and corresponding liability to make payments that must be recorded on the balance sheet.
Just like these examples, your company may uncover leases in unexpected places. When identifying your leased assets, these are the categories to examine:
Equipment Leases in a Decentralized Environment
Working in a decentralized environment can present challenges, as most likely, multiple people own the equipment leasing process. And because nearly any area with a budget or expense authority can execute some type of lease, you may be looking for contracts that are done within the department. Be sure to review these non-traditional functional areas for functional leases:
When it’s time to upload, it’s likely to be a manual process, so give yourself ample time to bring over the old data sets and new data you’ve abstracted.
If you need assistance transitioning to the new standard, Accruent has a team of FASB experts ready to answer any questions you might have. Our FASB implementation analysis will help you identify your current procedures and potential “gotchas” during your FASB/IASB transition.
1Paving a Path to Success: Preparing for New Lease Accounting Standards. June 2016. Ernst & Young LLP and Financial Executives Research Foundation (FERF).
2Audit Committee Spotlight: Getting Ready for Lease Accounting Changes. 2017. Grant Thornton LLP.