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Get Ready for Leasing Changes

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By Michael Cohn
April 4, 2012

Ernst & Young is advising its clients to be prepared for the new lease accounting standards that are due to come out from the Financial Accounting Standards Board.

FASB and its counterpart, the International Accounting Standards Board, are planning to re-expose the latest version of the leasing standards in the second quarter of the year, though they still have a few issues to sort out after a disagreement recently emerged over income statement changes for lessees (see FASB and IASB Part Ways on Leasing Standards). However, the two boards are mostly in sync at this point on the main issue of carrying leases on the balance sheet, even though that’s still a sore point for many companies. The final standards are not expected to come out until mid-2013, but Ernst & Young is urging its clients to get ready.

“Some accounting standards only affect certain companies, but just about everybody has some lease,” said Betty Davis, a partner in Ernst & Young’s Financial Services Office. E&Y has been following FASB and the IASB’s re-deliberations over the standards after they were blitzed by comments criticizing the proposed changes in the initial exposure draft they issued.

Despite the prolonged re-deliberations and the upcoming re-exposure of the latest draft of the standards, FASB has indicated it won’t be an infinite delay until the new standards are finally in place.

“We’re saying to clients, ‘Have you been thinking about what you need to do to get ready?’” said Davis. “It’s difficult to get clients to spend lots of money on proposed guidance that may change, but we’re urging them to have the data available to make their calculations, and they should start thinking about whether they need some new software. This is not just an accounting department-only exercise.”

Davis noted that companies should be evaluating what makes sense from a business perspective about the impact on their financial situation, and how much to invest on the systems they will need. Some businesses function as both lessees and lessors. Financial institutions and real estate companies may fulfill both roles, especially if they have branch banks and offices that they lease. Airlines have plenty of aircraft that will be making their initial appearance on a balance sheet and the liabilities from those leases are going to grow. The debt-to-equity ratio is going to change at many companies, and financial analysts will need to compare the effects at companies across a given industry.

“Our key message at this point in the process is to start now,” said Davis. “Don’t wait until the final standard comes out. Get educated and start forming your teams. Follow the guidance as it develops. Think about what you can automate, and what packages might be available to automate and educate your stakeholders.”

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