Moody’s predicts big impact from lease accounting changes

Moody’s Investors Service is putting the spotlight on accounting in the first of a series of reports examining the impact of the new lease accounting standard on public companies in their annual and quarterly reports.

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The Moody's Investors Service Inc. logo is displayed outside of the company's headquarters in New York, U.S., on Tuesday, Feb. 21, 2012. Moody's Corp. is a credit rating, research, and risk analysis firm. Photographer: Scott Eells/Bloomberg

“One of the most transformative accounting changes in recent history is on the horizon,” said the company in the first report in its "Accounting Spotlight" series, released Thursday. “ASC Topic 842, 'Leases,' which brings operating leases onto the balance sheet, will be adopted by public companies in the 2019 Form 10-Qs by calendar year-end. Although investors may understand the new rules, understanding the application to specific company transactions is more difficult.”

The report points out that while the Securities and Exchange Commission already requires companies to disclose the impact of accounting changes to be adopted in the future, historically such disclosure has offered little information. However, the SEC staff has indicated in recent public appearances and speeches there will be greater scrutiny of the disclosures given the significance of the upcoming accounting changes.

“We believe the most transformative accounting change will be the quantitative insights that many companies will be reporting for the first time about the upcoming lease accounting change,” said Moody’s senior accounting analyst Kevyn Dillow in a statement. “Reviewing a company’s disclosure of the impact of accounting standards not yet adopted will allow comparison of the company calculated lease obligation to the historical estimates analysts have made of these lease obligations.”

Moody’s has historically made estimates to include operating lease obligations within its metric calculations, but the report noted that reviewing a company’s disclosure of the impact of accounting standards it has not yet adopted allows a comparison of the company’s own calculated lease obligations with the historical estimates that analysts such as Moody’s have made of the lease obligations. For example, the report compares the 2017 fiscal year-end lease adjustment for Amazon with the impact of the accounting change disclosed in Amazon’s 2018 Form 10-K.

The Tax Cuts and Jobs Act will also have a major impact this year on corporate financial reports. “Companies with calendar years ending Dec. 31, 2018, will have a full year of income tax expense under the TCJA,” stated Moody’s senior accounting analyst David Gonzales. “This can provide some insight into a forward-looking view of a company’s effective tax rate inclusive of all TJCA regulations, including some of the more nuanced provisions that we may only see details through a company’s current income tax expense payable to the U.S. government or broken down in a company’s required rate reconciliation.”

The report also examines the impact of the new revenue recognition standard, increased pension contributions, risks from political uncertainty and other accounting issues that will be significant for investors this year.

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