Ready or not… here it comes! The new lease accounting guidance will be effective before we know it. ASU 2016-02, Leases (Topic 842) will result in some pretty dramatic changes to the balance sheet for companies that lease assets. Public companies with calendar year ends have to adopt the new standard on January 1, 2019, while private companies get a bit of a reprieve—they need to be ready to adopt the new standard on January 1, 2020.
So what’s it all about? The new rule will have lessees moving right-of-use assets and associated obligations out of the footnotes and onto their balance sheets. Some companies will end up looking more leveraged than they did under historical GAAP. And, during the process of implementing the new rule, everyone will gain a better understanding of the many lease agreements throughout an organization.
It won’t happen overnight. Those deadlines seemed so far off when the Financial Accounting Standards Board (FASB) adopted the new standard two whole years ago, but we’re now at the point that companies need to look at their leasing agreements (you may be surprised at what you find!), figure out any changes they need to make to current practices and systems, and think about the potential impacts.
All this needs to happen while the FASB is still making tweaks to the guidance. This past January, the board released a proposal that could tack on two new practical expedients:
- Companies wouldn’t have to provide comparative financial statements: The original guidance would require lessees, beginning at the earliest period presented in financial statements, to recognize and measure leases using a modified retrospective approach. For example, if you are adopting the new standard on January 1, 2019, you would have to measure and recognize leases as of January 1, 2017. But the new proposed option would let companies apply the new guidance at the effective date without having to adjust for their prior periods that are presented comparatively. So, for our example, you wouldn’t have to measure and recognize leases that expired before January 1, 2019.
- Lessors would get a new break. The current guidance allows lessees (but not lessors) to separate the lease and nonlease components and account for the entire agreement as a lease. Lessors oftentimes provide services other than just the lease—for example, maintenance services in an equipment lease. The second practical expedient proposed by the FASB would allow lessors to also not separate lease and nonlease components.
Both of these proposed changes would provide some simplification and ease the transition a bit (every little bit helps!). The deadline for comments was February 5, so hopefully we hear something soon.
Getting ready for new way of lease accounting
For those of you still trying to wrap your head around where to begin with the new rule, I recommend checking out What CFOs Need to Know About the New Leasing Standard, an excellent blog post written by my colleague Diana Gilbert, who heads RoseRyan’s Technical Accounting Group.
For those of you who have already sifted through the almost-500 pages of the new standard and think you have your arms around what you need to do, here are a few challenges that you might not expect:
You may have a lot of data digging to do: Finding and aggregating all of your company’s executed and signed agreements can be a daunting task. Most companies don’t have a system in place for keeping track of them, and some of your departments may have been pretty casual about documenting the deals they’ve made.
Then, once you do go through the process of getting a list together, you need to figure out whether each agreement contains a lease. This determination could be very easy, but other times, the answer may not be straightforward—is it a lease or purely an agreement for buying or selling goods or services?
You’ll also need to build in time for any international agreements. You may need to translate them into English so that you can understand all the terms! Clearly, depending on your company, there’s a lot to tackle here, and it can’t wait until the last minute.
The finance team may understand the new standard but does anyone else? The new standard can be tricky, even for accountants who have read every sentence of the guidance. We may know the details and are considering how things need to change, but those around us might not be thinking about it without our input. Don’t underestimate the learning curve. For instance, it may fall to the finance team to educate the facilities or operations groups on how to structure future deals.
Don’t forget about your auditors. You may have all the best of intentions and be doing everything right to put the new standard in place, but you’ll still need to show your work. Be aware that your auditors will focus on the implementation of the standard and will scrutinize the details—much more than they focused on the prior footnote disclosures.
January 1, 2019 is coming—there’s no putting it off now! Now is the time to ask questions and make your way through all of the agreements. Accounting expertise from seasoned pros who are already knee-deep in this standard and on top of the latest changes can help get you over the finish line. You’re so close.
Clarissa Enany, a member of our Technical Accounting Group, has held a variety of finance roles, including External/SEC Reporting Manager, Accounting Manager, Controller, and Technical Accounting Manager at companies like Symantec, Affymax and NovaBay Pharmaceuticals. She also worked at DocuSign, where she managed the month-end close process, accounts payable and payroll.
Looking for more tips on technical accounting? Join Diana Gilbert for an upcoming webinar, “Lessons learned from revenue recognition implementations,” on March 22, from 10-11:30 a.m. PST. Diana will unlock the many mysteries of revenue recognition implementations so you can streamline yours. For more information and to register, go to: bitly.com/revreclessons.