The Financial Accounting Standards Board’s new lease accounting standard could have some positive payoffs for companies if they take a careful approach to implementing it.
FASB released the long-awaited standard last week after a decade of work with the International Accounting Standards Board as one of their major convergence projects (see FASB Releases Lease Accounting Standard).
“Companies are now realizing this is real,” said Sheri Wyatt, managing director of PricewaterhouseCoopers’ Capital Markets Accounting Advisory Services. “Now they need to start thinking about what the impact is going to be on their organization.”
The standard will add operating leases to the balance sheet for the first time for many companies, and they will need to begin tracking down all of their leases.
“Companies today are required to disclose their leasing commitments,” said Wyatt. “I don’t want to give the impression that companies don’t know what their lease obligations are. But with the new standard and the prominence on the balance sheet, they need to ensure that the information they have is complete and accurate. While we tend to find companies have a relatively good arm around their real estate portfolio, the equipment leases are probably a category of assets where they may be a bit more disbursed across an organization. Even though it might not be the most significant part of what they’re putting on the balance sheet, it may be one of the more significant efforts in order to get there.”
Many companies will need to draw up a plan to get ready for the new standard, even as they also work to implement FASB’s revenue recognition standard.
“The key will be understanding where you’ve got to get to and then working backwards and understanding the gaps you have today,” said Shane Foley, a partner in PwC’s advanced risk and compliance team. “The number and complexity of leases from one company to the next are going to vary. Some folks may have it easier in terms of what data they have today and what data they need tomorrow, versus others where the rigor may not have been as strong or as necessary in the past. Putting a project plan in place is really key.”
An important part of the project plan will be the data. “The project plan will first need to address the data needs,” said Wyatt. “Simultaneously while companies are in the process of getting that data, they need to think about the various accounting policies that might need to be set up, whether it’s around embedded leases, whether it’s around policies around modifications and various reassessments. The starting point is sitting down and identifying who your core team is going to be, and then laying out a project plan that will get you to a point where you are able to potentially quantify the impact of the new standard.”
The impact could bring some positive benefits to companies.
“If you’re only looking at it from a compliance requirement, you’re probably going to miss the opportunity to get visibility into your full leasing portfolio, which some companies have not had in the past,” said Foley. “Getting that visibility may allow you to make better decisions around your leasing portfolio, and in the end create efficiencies within the organization. Depending on the company, what we see is the lack of centralization in some cases has not led to the most optimized capital decisions. By getting it all in one place, you have the opportunity to seize those benefits. That comes with certain things like how you handle the assets at the end of the lease. Maybe in the past, those decisions were inconsistent around the organization. By putting it in one place, you have the ability to make those decisions in a consistent manner and that may result in better efficiency for the organization.”
Some companies may want to renegotiate leases, enter into shorter-term leases, or decide to buy certain assets rather than continue to lease them. “Around the point of shorter-term leases, that’s something that we hear quite a bit,” said Wyatt. “But I do think there’s an economic cost to shortening a lease term in the sense that the lessor takes on more risk with respect to that asset when it’s a one-year lease as opposed to a five-year lease, and therefore that could impact pricing. But I think that’s something companies will evaluate and go through a lease vs. buy analysis as they start to evaluate what makes the most sense for the company.”
The lease vs. buy decision will probably depend on the type of asset. “When you think about real estate, that’s obviously a fairly significant investment for an organization,” said Wyatt. “A lot of times, it’s a part of a building, a floor or a retail unit in a shopping center where it may not be as economical to buy that. But given the fact that all leases are going to go on the balance sheet, that might come back into focus for the companies where maybe they’re able to negotiate for real estate. For example, do I condominium-ize a portion of the real estate and acquire, say, that floor or that particular unit, given the fact that the balance sheet may more or less look the same? That’s where companies haven’t necessarily gone through a robust lease vs. buy process, given the off balance sheet opportunities under current GAAP.”