According to "Paving a Path to Success: Preparing for New Lease Accounting Standards" published in June 2016 by Ernst & Young LLP and Financial Executives Research Foundation (FERF), only 27% of finance and IT executives feel confident about meeting the critical milestones to comply with the FASB and 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.
Equipment Lease Accounting Considerations
From the recent report titled Audit Committee Spotlight: Getting Ready for Lease Accounting Changes, published in 2017 by Grant Thornton LLP, "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 required to collect the data and info for equipment lease accounting 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)
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:
- Office Equipment
- High-Value Assets (e.g., railcars)
- Embedded Leases
Equipment Leases in a Decentralized Environment
Working in a decentralized environment can present challenges, as most likely, multiple people own the equipment leasing process. 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:
- Human Resources – employment contracts.
- Marketing – vehicle advertising, brand ambassadorships.
- Facility Maintenance – art work, gym equipment.
- Office Services – mail centers, copy operations, beverage service.
- Service Agreements – all need to be evaluated for embedded leases of equipment.
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 and IASB transition.
Learn more about FASB readiness in part two of our FASB Readiness Series, Accounting Assumptions, ASC 842 Test, Outputting Reports.