The new lease accounting standard is likely to have a much greater impact on lessees than lessors.
The Financial Accounting Standards Board released the long-awaited standard last month (see FASB Releases Lease Accounting Standard). The Equipment Leasing and Finance Association, a trade group that gave input to FASB on developing the new standard, is creating materials to help its members adjust to the new standard, which will take effect for public companies for fiscal years beginning after Dec. 15, 2018 and for other organizations for fiscal years beginning after Dec. 15, 2019.
“We’re really trying to make sure that leasing companies get up to speed on the new rules,” said ELFA president and CEO Ralph Petta. “These things have been in the works for so long now that we’re fairly confident that leasing companies probably understand what’s in the rules from a lessor and a lessee perspective. The big thing is the lessees are themselves digesting the new rules. There is time and a transition period for them to adopt. In general, we are impressing upon our members, the lessors, to educate their dealers and their vendors, to educate their sales team and really be thinking about what they need to do internally in terms of staff or systems to plan for the new rules. Not a lot has changed from the lessor perspective. Probably more has changed from FAS 13 to the new rules for lessees.”
FASB worked with the International Accounting Standards Board for about a decade on converging the leasing standard. There are some key differences between the versions that came out for U.S. GAAP and International Financial Reporting Standards. However, both versions share in common the goal of putting operating leases on the balance sheet. FASB’s version is closer to what ELFA wanted.
“The big change is for lessees, and it is a huge change in terms of work,” said ELFA member Bill Bosco, a principal at the consulting company Leasing 101. “Transitioning to the new rules means booking every operating lease as an on-balance sheet transaction and then setting up a process going forward. Lessors don’t have a lot of work to do, but the lessees will.”
That’s especially true for large retail companies that have leases on stores across the country. Big banks with many local branches will also have to account for the leases on those properties, while airlines will need to list the leases on the airplanes they fly. Former IASB chairman Sir David Tweedie used to joke at accounting conferences that it had been his longstanding ambition to one day fly on an airplane that was listed on an airline’s balance sheet.
Bosco believes the drug store chain Walgreens will have the most work to do. “The largest lessee in the United States is Walgreens in terms of the most amount of operating leases,” he said. “The last 10K that I looked at, which was last year’s, before they acquired Rite-Aid and Boots, said they had 8,400 real estate leases.”
Each of those leases is not necessarily so simple either.
“Real estate leases are pretty complex because most of them are gross-filled leases, meaning that the lessee pays for not only rent, but also for common-area maintenance, utilities, landscaping, a whole host of other services,” said Bosco. “It’s a full-service bundled lease in most cases. Some leases are triple net leases. The new rules say you only have to capitalize the lease portion. To record a real estate lease, it means you’ve got to get the lease document, you’ve got to read the lease document, you’ve got to find out whether it’s a gross-filled lease or not, you’ve got to go back in time and get the details of the portion of the payment that’s a lease payment or not, and you might have to call up the landlord and get some information. When you transition in 2019, the SEC requires comparative statements, so you’ve got to do a P&L for 2017, 2018 and 2019, and the balance sheet for 2018 and 2019. That means you can’t just start working on it in 2019.”
One of Bosco’s clients estimates it would take about an hour to put a single lease into a system. For Walgreens that would translate into 8,000 man hours, the equivalent of approximately three man years’ worth of work.
“That’s not counting what Walgreens probably has in business from the ELFA membership base, like company cars, trucks, cash registers, PCs, copiers, fax machines,” said Bosco. “I think it’s four or five man years of work for a company like Walgreens, so they’d better start to work on it right now.”
Bosco recommends that large lessee companies start to form transition teams and make transition plans to deal with the new standard.
“People have enough time if they start working on it now,” he said. “But they shouldn’t procrastinate or have a false sense of security that they have until the end of 2019 to get it done. It can’t just be inexperienced people. It’s not just a clerical job. Most big companies have lease administrators on their staff, but they have a full-time job as it is. They can’t just drop everything and five or six of them start working on this, and complete it a year later.”
Not only retailers, banks and airlines need to worry about the new standard. “Every company leases office space, warehouse space, PCs, company cars, delivery trucks, airplanes,” said Bosco. “It’s going to be a large test, especially for those companies that have retail networks.”