Nearly 80 percent of business executives surveyed last year by Deloitte anticipate that complying with the lease accounting standards that the Financial Accounting Standards Board and the International Accounting Standards Board have been collaborating on will be difficult, with concerns especially high about data quality and information technology systems.
The latest findings indicate that companies generally are no more prepared to comply with the new leasing rules than they were in 2011, when Deloitte conducted a similar study.
The 2013 study confirms several big concerns held by both lessee and lessor companies on the proposed standards. Topping the list are concerns about the quality of data, complexity of compliance and the executives’ general lack of confidence in their IT systems. Only 1 percent of the survey respondents at real estate lessee companies said they were “extremely” well prepared to comply, down from 9 percent in 2011.
The survey was based on a revised exposure draft of the lease accounting standards issued by FASB in May 2013. The survey was conducted online from May 29June 21, 2013 and was completed by 138 executives at companies that have equipment leases, real estate leases, or both. Deloitte cautioned Wednesday that the information obtained during the survey was taken “as is” and was not validated or confirmed by the firm.
According to the survey, many executives indicated they are worried about the financial reporting effects of the new leasing standards, with 58 percent expecting a significant impact on their balance sheet and 53 percent expecting an impact on disclosures.
Deloitte also found that 62 percent of large companies and 49 percent of smaller companies said they believe that the adequacy of the IT systems would present a significant challenge. In addition, 55 percent of large companies and 33 percent of small companies cited creating an electronic inventory of real estate leases as a significant challenge.
Despite a decline in the number of companies looking to do so from two years ago, many companies are still looking to upgrade their IT and data systems in response to the new lease accounting standards. In 2011, one-quarter of respondents expected to make a major upgrade to their IT systems, while 20 percent said they expected to acquire a new system. Today, those figures have fallen to just 20 percent and 12 percent, respectively.
More than half of all the surveyed executives said they believe implementation will require more than one year, a 33 percent increase from the 2011 survey.
The finalized lease accounting standards might be issued this year, although significant differences still remain among the standard-setters. The expected effective date is not expected to be any sooner than 2017. The standard would require companies to recognize on their balance sheets the assets and liabilities resulting from all leases of more than 12 months in duration, based on the present value of the lease payments.
A report last week by The Wall Street Journal on a recent joint meeting between the standard-setters indicated that FASB and the IASB may scale back the scope of the new standards to avoid making major changes in the lessor accounting rules, instead focusing on lessee accounting.
The executives surveyed by Deloitte predicted the new standard will place a greater reporting burden on lessees of real estate (88 percent) and equipment (85 percent), as well as lessors of equipment (73 percent) and real estate (71 percent).
Executives at companies where less than half the real estate portfolio consists of full-service leases were much more likely to anticipate major or significant impacts to the balance sheet, disclosures, financial ratios, and the income statement.
“It’s clear that lessees are increasingly forecasting difficulties complying with the new standard, though the concerns for lessors look to be easing,” said Deloitte Transactions and Business Analytics LLP director Scott Hileman in a statement. “The lack of progress and, in some cases, regression on compliance since 2011 is partly a result of the uncertainty regarding the new standard. However, given the standard's complexity, the financial impact and the significant data challenges posed, companies should start getting their houses in order.”
Nearly half of the executives polled by Deloitte cited an effect on financial ratios from the new leasing standards, with significant effects on debt to equity (71 percent) and return on assets (52 percent) cited by the survey respondents. The impact on lessees appeared to be more severe than on lessors, with the former group far more likely to cite these impacts.