While most corporate financial executives are assessing the impacts of the new lease accounting standards issued by the Financial Accounting Standards Boards (FASB) and International Accounting Standards Board (IASB), 23 percent of companies have yet to begin the initial adoption process of the standards, according to a new survey released by PwC US and CBRE Group, Inc.
The new FASB/IASB standards, ASC 842 and IFRS 16, respectively, require all leases to be recorded on a company’s balance sheet starting in 2019 (2020 for private companies). Many companies see the importance of the changes to come, with 52 percent of respondents currently assessing the impact and 25 percent having already started the implementation in process. This preparation is important as 47 percent of executives who have started implementation said that the efforts required are greater than expected. Specifically, data collection, systems and resources are considered the biggest challenges with approximately three-fourths of respondents identifying these as difficult implementation issues.
In last year’s survey, 84 percent of respondents planned to begin implementation in 2017. However, current results found that only 77 percent of organizations reported having started their efforts, with most in the early stages. Companies should use the remaining time to their advantage to ensure compliance and capitalize on opportunities for operational efficiencies and greater visibility to lease portfolios.
Seventy-four percent of companies are expecting systems changes with over half stating they will implement or develop a new solution. However, only 23 percent have already selected a leasing solution. Currently, 70 percent are collecting data from lease contracts by manual means “in house” to comply with the new accounting standards. Regardless of method, data collection is a critical, but time-consuming step toward compliance and long-term system automation.
“Given the breadth and potential systems and process changes associated with implementing the new standards, companies should consider a phased approach that begins with a current-state assessment focused on lease inventory, processes and data and system capabilities,” said Sheri Wyatt, Partner in PwC’s Capital Markets & Accounting Advisory Services practice. “Some companies may be underestimating the time and effort required, but a comprehensive assessment will ultimately provide better clarity around the length and complexity of adopting these new standards.”
For companies that have yet to start the adoption process, there are a few things that can be done now to ensure compliance by 2019:
- Determine the current state. The first step is to figure out what the leasing portfolio actually looks like and assess the potential impacts of applying the standards, which will help companies understand the volume and nature of leases they have as well as potential complexities. This assessment can help a company begin planning.
- Begin data effort. In addition to data collection, companies should plan to close data gaps and remediate any data quality issues. Companies shouldn’t wait too long to assess their data as accumulating this information can be a lengthy process, so don’t delay.
- Select a system to conduct the accounting. Many companies already have a system in place to manage real estate leases, but additional needs may exist for accounting and reporting requirements, as well as accommodating large volumes of non-real estate leases. System implementation can vary greatly so it is important to leave enough time to identify and implement the right system to match a company’s unique needs.
Beyond compliance, several potential benefits can be achieved as a result of companies’ efforts to comply with the new standards. Forty percent of companies believe they will have improved lease portfolio reporting, while 35 percent see improved visibility into key leasing costs and improved lease portfolio administration as potential benefits.
“The survey results confirm that many public companies, for various reasons, including concentrating on implementing the new revenue recognition standard in 2018, have not been focused on the new lease accounting standards. These companies are now beginning to realize they are only six quarters away from the effective date and that it is time to pick up their pace,” said Jeff Beatty, Senior Managing Director of CBRE’s Financial Consulting Group and leader of the company’s Global Lease Accounting Task Force.
For the full survey results, key findings and methodology, click here.