Companies Expected to See Biggest Impact from New Leasing Standard
The lease accounting standard that the Financial Accounting Standards Board plans to release this quarter is expected to have a major impact on many companies, requiring current off-balance sheet leasing activities to be reflected on balance sheets for the first time.
Earlier this month the International Accounting Standards Board released its version of the standard, which differs in some key respects from FASB’s (see IASB Releases Lease Accounting Standard). A new study from LeaseAccelerator, a developer of equipment lease management software, examines the impact of the new leasing standards on major U.S. corporations, listing the off-balance sheet lease obligations of the 500 largest U.S. public companies. The report, “Who is Most Impacted by the New Lease Accounting Standards?” aims to provide greater awareness of the potential impact of the new lease accounting standards.
Both the recently announced IFRS 16 and the forthcoming FASB ASC 842 will require companies to transfer their operating leases, previously only disclosed in the footnotes of their financial reports, onto their balance sheets starting in 2019, the report noted. They will replace IAS 17 and ASC 840 (formerly FAS 13), respectively. According to the IASB, listed companies around the world have around $3.3 trillion of leasing commitments over 85 percent of which do not appear on their balance sheet.
The companies that are expected to be most affected by the new capital lease accounting standards will be those with the largest operating lease obligations. The off-balance sheet leases for a specific company can range from a few million dollars, on the low end, to tens of billions of dollars, on the high end.
“With comparative reporting requirements for the new lease accounting standards starting as early as 2017 for most firms, we believe that many Fortune 500 companies are woefully unprepared for the new lease accounting standards, especially their equipment lease portfolio,” said LeaseAccelerator CEO Michael Keeler in a statement. “We hope the publication of this report will provide CFOs with a perspective on the relative size and significance of their operating lease obligations compared to their industry peers and prompt a proactive investigation of solutions given the 2017 income statement comparables deadline.”
Many companies will have to start as early as 2017 and effectively run two sets of books to be compliant and ready for the 2019 deadline.
Companies will need to do some work to prepare for the new standard when FASB issues it. “I think most companies, because of the uncertainty of the timing of the issuance of the new standard, the readiness activity has been a little slower,” said Sean Torr, advisory director at Deloitte & Touche LLP. “Most companies have been waiting to understand the end result and the timing. Now that we do have a final standard we are seeing clients definitely engaging in the discussion, on next steps to kick off the readiness activities. As it relates to an implementation effort, there’s obviously a very significant impact for companies across a lot of different components of an organization. The accounting standards obviously have an impact on accounting, but there’s also an IT component to it. Tax, budgeting and forecasting are impacted, along with the human element and internal control. There’s a pervasive set of consequences to an organization.”