Companies in technology, manufacturing, telecoms and oil and gas could be the hardest hit by the new lease accounting standards (ASC842) which come into effect in January 2019.
The new lease accounting standard fundamentally changes accounting for lease transactions and will move thousands of lease contracts onto a company’s books and demands a level of data collection, storage and lease accounting that was not previously required. Leased assets include for example premises, vehicles, machinery and equipment. For global companies, leased assets will need to be collated from all over the world and on a huge scale. Once a company has centralised its leases, deeper analysis and additional levels of accounting will be required to comply with the new standards, for example if third parties are involved.
Aptitude Software analysis shows that the new standards are likely to have significant business implications for companies across sectors due to the volume of different types of leases held on disparate systems. Sectors such as technology, manufacturing, telecoms, oil and gas maybe the most exposed as they are asset heavy and have complicated lease arrangements all over the world.
According to the International Accounting Standards Board, listed companies are estimated to have about $3.3 trillion of leasing commitments, and leasing obligations across individual corporations can range from a few million to tens of billions of dollars.
“The new leasing standards are a data nightmare," said Ross Chapman, global marketing director for Aptitude Software. "One global telecoms provider estimated that they had more than 7 million leases, whereas it is more common for large companies to have tens of thousands of leases. Lease arrangements and the process of accounting for them are complex. Finance teams need to evaluate thousands of individual lease agreements, capture the right data and apply the new accounting policies under hundreds of different business scenarios.”
The PwC Global Lease Capitalisation study from February 2016 indicated that the retail industry is also likely to be one of the most affected by the new standard, given the significant use of rented premises for retail stores whether this is individual stores, High Street locations or shops within department stores, are likely to qualify as leases. The PwC study estimated that there would be a median debt increase of 98% for retailers, and 41% median increase in EBITDA.
“The new standards mean that a company’s lease exposure will be laid bare for everyone to see, and it may have significant business implications for them," Chapman added. "It is imperative that CFOs gain a deeper understanding of the terms of their global lease portfolios. Implementing ASC 842 accounting software solutions will help them achieve this.”
The Aptitude Lease Accounting Engine offers data capture and complex accounting capabilities which allows companies to comply with ASC 842 while retaining current lease administration systems. This enables CFOs to address the new lease accounting rules, gain more financial control whilst causing minimal disruption to existing software systems. Aptitude Software is working with many of the largest organisations on their ASC 842 compliance.