Could a fresh look at lease data add up to future savings?
Find out how EY can help you adopt a new perspective on accounting change compliance and unlock better business benefits.
Coming so close together, the dramatic changes in accounting for revenue recognition and leases pose an implementation challenge that will be significant to many companies impacted by the new standards. The best way to manage concurrent accounting changes is to drive a timely, orderly transition that can greatly minimize costly surprises and disruptive missteps.
With that approach, you will be better poised to take advantage of the dividend that compliance can bring: improvements in business processes, IT systems and controls that can pay off operationally throughout your organization.
Currently, most lease transactions are off-balance sheet for lessees, leaving the economics subject to interpretation by investors and analysts. The new standard will put most leases on the balance sheet by recognizing lease assets and liabilities and will require more disclosure, with the goal of increasing transparency and comparability.
Timing of new leases standards
For US GAAP filers, the new leases standard goes into effect on 1 January 2019 for calendar-year public business entities. The standard requires three years of comparative financial statements, with the initial application date of 1 January 2017 for December year-end filers. (That date would be even sooner for those choosing to early adopt.)
That leaves less than one year for much of the up-front work to be accomplished — at a time when many companies are, or should be, deeply involved in addressing changes to revenue recognition.
How complex is the up-front work to operationalize the lease accounting change? And how broad is its impact? How do you get started?
- Getting started
To get started, or to accelerate the process and avoid missteps, undertake a diagnostic review. Our experience with clients shows that establishing a snapshot of your people, process and technology readiness to take on new accounting rules creates a clear picture of what is needed to bridge the gap to the required future state.
- Engaging stakeholders across your organization
All of this effort will require support across functions, departments and geographies, with major input from the finance function supplemented by treasury, corporate real estate, legal, IT, tax, procurement and, of course, your business operations.
To make the decisions and settle on the numbers, you will have to get your arms around your full leasing portfolio, a task that can be much harder than you expect. On the more daunting side of the spectrum, decentralized global operations, multiple, disparate IT systems and a track record of struggling to implement major change programs are all indicators that additional planning may be required.
- Identifying leases
You will need to determine which of your arrangements contain a lease; that depends on whether they involve the use of an identified asset and convey the right to control the asset’s usage. Furthermore, there is a flow of ancillary questions.
- Are there non-lease components in the arrangement?
- What is the lease term, considering renewal, termination and purchase options?
- What is the lease classification?
- Is it a finance lease (interest and amortization expense) or an operating lease (generally treated as a straight-line rent expense)?
- Judgments and estimates
While judgments and estimates have always been part of lease accounting, those decisions and numbers may receive heightened scrutiny because of their balance sheet impact to the financial statements and additional disclosures. Developing a clear set of policies and standard operating procedures will assist in making sure that these judgments and estimates are consistently applied across your organization.
Also at a disadvantage are companies that lack consistent processes and tools to manage lease administration and accounting, resulting in leases tracked in spreadsheets (if at all). The change in lease accounting will present both a challenge and an opportunity to enhance systems, control costs and optimize your lease accounting and administration processes as you comply with the new standard.
Optimizing the outcome of lease accounting changes
We can help, particularly in terms of evaluating the readiness of your current state lease administration and lease accounting capabilities for the new standards.
- Does your data structure satisfy the new accounting requirements, including disclosures?
- Are contract and lease data available and complete?
- Do you need additional data?
- Are changes necessary in your processes and controls?
- How will you apply technology to gain efficiency and improve controls?
Our diagnostic will reveal which actions may be needed, not only to meet the accounting challenges ahead but to take advantage of the new capabilities and insights that compliance will make possible.
New changes, elevated risks
The new leases standards bring with them numerous risk factors that organizations must actively manage in order to achieve compliance and capture added business value from mandated change.