Lease accounting standard has technology hurdles
The lease accounting standard that public companies are gearing up to comply with by the end of the year is presenting them with some technology obstacles, according to a new report from Big Four firm Deloitte.
The challenges include new data elements, data housed in various systems, relevant information being spread across multiple lease agreements, a high volume of data fields, and multiple languages, contracting parties and currencies. In many cases, the lease agreements aren’t in electronic format, and there’s often a lack of in-house resources to deal with the new standard.
“We are definitely seeing that companies are not fully prepared for implementing the lease standard,” said Jeanne McGovern, an audit and assurance partner at Deloitte. “They’re seeing a number of key challenges in terms of operationalizing this, surrounding data collection and working through any system, either modifications or implementing a new system. At this point, the challenge is that the time is running very short to be able to execute and be in compliance by Jan. 1, 2019.”
The new lease accounting standard, which the Financial Accounting Standards Board and the International Accounting Standards Board collaborated on for several years, will add operating leases to the balance sheets of companies for the first time. It’s likely to have a large impact on the financials of companies in many industries, including airlines, real estate and the retail sector. Although there are differences between the versions of the individual standards that eventually emerged from FASB and IASB despite their long-running convergence effort between U.S. GAAP and International Financial Reporting Standards, both standard-setting boards made the significant move of putting leases on the balance sheet.
One question for many companies is deciding whether to use cloud-based technology or an on-premise solution, according to the report. Another strategic question is considering whether or not to centralize or decentralize the systems and processes related to leases.
“From our research, it comes down to what the company’s lease portfolio actually looks like, and how complex it is,” said Sean Torr, a managing director at Deloitte. “It’s clear that most companies are looking for some form of technology solution, whether it be modifying their existing solutions or procuring a new solution. For most companies there is a technology component to their overall implementation. The level of preparedness for most companies is lower than would be expected at this point, so companies are grappling with the timeline component of this implementation. You’ve got a few very long lead time activities that have to be conducted: selecting, installing and testing technology solutions, as well as populating that solution with the data that is required to perform all the calculations, so the window of time is narrowing quickly for companies. Companies are starting to realize there’s still a lot to effort to be ready for the standard.”
During a recent Deloitte conference in Washington, D.C., on the leasing standard, the firm polled the corporate executives in attendance about their concerns in adopting the new standard. It found that 49 percent of the respondents cited the cost of implementation, 21 percent referred to the material impact on the company’s financial statements, 12 percent cited the time limitations for executive involvement, and 5 percent said data security issues.
Some companies might decide to install a temporary technology solution before they run out of time.
“There are certainly solutions that a company can put in place in the interim,” said Torr. “We’re actually starting to see more companies exploring an interim solution while in parallel they implement a longer-term solution. There are solutions that companies are starting to realize they need to achieve the compliance deadline. This does provide companies an opportunity to focus on the broader process and technology components for the long-term. Some companies are exploring implementing a lease administration as well as a lease accounting solution. Those solutions may take a longer time to implement than the window of time that they have. That’s why they’re exploring this interim solution as well.”
If companies do opt for a temporary fix, they should try to avoid repeating the same work.
“When companies think they need to implement an interim solution before they get to a long-term vision of how they’re managing their lease portfolios, try to aggregate and gather the data from lease agreements once with a long-term solution in mind so that leases don’t need to be handled twice,” McGovern advised. “They only need to be reviewed and the appropriate data collected once. It’s important for companies to be thinking about what their longer-term objectives are and incorporating that into their planning, even if they do need to choose an easier to implement solution.”
When asked what area of their corporate planning is most impacted by the new lease accounting changes, 37 percent of the respondents polled by Deloitte cited compliance, 23 percent said new corporate policies, 14 percent named financial planning, 9 percent cited lease vs. buy decisions, and 5 percent referred to tax planning.
When asked what area they are most focused on with their auditor or clients, 73 percent of the survey respondents cited the completeness of lease accounting, 11 percent referred to materiality issues, 7 percent named internal controls, and 2 percent said technology advice.
Privately held companies get an extra year to implement the new standard, just as they do with the revenue recognition standard. But they shouldn’t wait long to get ready for the leasing standard, even though they’re still in the midst of implementing the rev rec standard that takes effect for them next year.
Another recent survey by Deloitte found that private company professionals are beginning to assess the impact of the revenue recognition standard on their financial statements along with business functions outside of finance and accounting. While 25 percent of the survey respondents expect a material impact on their company’s financial statements due to the rev rec standard, 13 percent reported that their organization has already developed a plan for other parts of the business. Another 23 percent are still in the preliminary stages of assessing the revenue recognition standard’s impact across business functions.
“Private companies should start to take a look at the lessons that we’re seeing and learning from public companies and get started sooner because there are long lead times on some of these activities,” said McGovern. “When we have polled some recent clients, including both public and private, we were seeing numbers around 21 percent that feel that they are well prepared for implementing the [leasing] standard, and that’s much lower than we would expect with this short of a time left. Hopefully private companies will start to put teams together to work on this.”
The technology for handling the leasing standard will need to be widely available at companies. “One of the things that we’re seeing is companies realizing how important stakeholder engagement is in this initiative,” said Torr. “This standard really impacts a broad number of stakeholders across the organization. As companies are going down the final path of the standard preparation, make sure that stakeholders are very well informed and involved in the process. A number of stakeholders will be leveraging the technology. The data will impact a broad number of people. The clear message we’re hearing from the market and from conferences is that stakeholder engagement, communication and training are really important.”