Introduction to Lease Accounting

Many companies lease (rather than buy) much of the equipment (forklifts, vehicles, computers) and real estate (offices, warehouses, factories) they use to run their businesses. There are many benefits to leasing, including increased cash flow flexibility and reduced risk of technology obsolescence. Historically, one of the benefits to leasing has been the accounting treatment: specifically the way the leases are reported on financial statements such as annual reports (10-Ks). Today, under the current ASC 840 lease accounting standard, leases are classified as capital leases or operating leases. Capital leases are reported on the balance sheet. Operating leases are disclosed in the footnotes of financial statements as “off-balance sheet” operating expenses and excluded from important financial ratios, such as return on assets, that investors use to judge a company’s performance.

However, off-balance sheet leases will soon be a thing of the past.  The Financial Accounting Standards Board (FASB), which governs the standards for US Generally Accepted Accounting Principles (GAAP), and the International Accounting Standards Board (IASB), which governs the International Financial Reporting Standards (IFRS), have introduced new lease accounting standards which will transfer these operating leases onto the balance sheet.

The two new standards recently introduced are:

New Lease Accounting Standards

Get Started with Your Lease Accounting Project

In this online guide, we have assembled all the resources you will need to implement the new lease accounting standards. Below you will find links to the technical accounting documentation from the Big Four and the standards boards. You will also find recommendations on how to staff the project team, budget for implementation, collect the leasing data, and evaluate software options. These best practices were collected from our team of 20-30 year leasing veterans, who have worked with many different Fortune 500 companies to manage and transform their lease accounting programs.

Some are calling the new FASB and IFRS standards the biggest accounting change ever. Trillions of dollars of real estate and equipment leases will move onto the balance sheet, impacting everything from financial metrics and debt covenants to purchasing strategies and executive compensation. Few companies are prepared for these new standards, which start to take effect in 2019.

Staffing the Project Team

As with any major project, one of the most important success factors will be assembling the right team of experts to lead the initiative. You will need representation from headquarters functions such as procurement and treasury, asset owners such as IT and real estate, and occasional participation from tax and legal. You will need a strong executive sponsor to champion the project with the board and leadership team as well as a rock star project manager to keep everyone on budget and schedule.

Budgeting and Planning

Securing the necessary budget and setting the proper expectations about timeframes will be two critical factors in the success of your lease accounting project. The good news is that lease accounting is one compliance program with potential for return on investment. Most companies have neglected the systems, processes, and controls related to equipment and real estate leases, creating lots of potential upside to be gained from re-engineering efforts.

Data Collection and Implementation

Implementing the new standards will take most large companies between 6 and 18 months. The biggest implementation hurdle to overcome will be collecting the necessary data about all your leases to perform the accounting. Few companies have an inventory of all the assets they lease, and even fewer have all the leasing documentation stored in a centralized repository.

Selecting Lease Accounting Software

Most companies will purchase a specialized lease accounting software package to comply with the new standards. With a dedicated subledger, these applications track all the financials related to your leases then generate debits and credits needed to produce your financial disclosures. Critical to the effectiveness of any lease accounting application is a strong lease administration system to track new leases, changes to existing leases, and end-of-term decisions about expiring leases.

Learning the Technical Standards

Before you can apply accounting policy elections or record your leases in a subledger, you will need to understand the details of the new lease accounting standards. The definition of a lease has been broadened and FASB introduced a new classification scheme. Although there are many similarities between the new IFRS and FASB standards, there are a few key differences related to the treatment of short term leases and the presentation of income statements.

Links to More Information about the New Lease Accounting Standards

Read what the Standards Boards and Big Four Have Published on Lease Accounting

FASB

FASB’s Lease Accounting Project Page

Goals and core principles of the project. How the new standard will change current GAAP. All the documentation released in the public domain from the original off-balance sheet obligation study to the final standard – ASU 2016-02 published in February 2016.

Visit FASB website.

IFRS

IFRS Lease Accounting Project Page

Explains goals, timeline, and latest updates on the new IFRS lease accounting standards. Includes all the historical documents from the original project proposal and discussion paper to the final standard (IFRS 16) published in January 2016.

Visit IFRS website.

PWC logo

PWC Lease Accounting Page

All of PWC’s resources for the new lease accounting rule. Includes links to technical accounting briefs, discussion documents, webinars, and podcasts from PWC experts. Includes perspectives on special topics such as “build-to-suit,” leaseback arrangements, and service contracts with embedded leases.

Visit PWC website.

EY logo

EY Lease Accounting Page

A comprehensive page listing all of EY’s resources on the new lease accounting rule. Includes “To the Point” and “Technical Line” documents as well as links to podcasts and webinars.  Also, check out the analysis of FASB’s lease impacts by vertical industries (automotive, airlines, consumer products, health care, financial services, etc.)

Visit EY website.

Deloitte logo

Deloitte Lease Accounting Page

Deloitte’s educational page about the new lease accounting standards. Includes a timeline of effective dates, list of expected impacts, illustrative accounting examples, and links to recent news.

Visit Deloitte website.

KPMG Logo

KPMG’s Lease Accounting Page

Includes links to newsletters, webinars, and discussion documents, such as first impressions, defining issues, and executive accounting updates (for lessors and lessees). Extensive coverage of IFRS lease accounting.

Visit KPMG website.

AICPA-logo

AICPA’s Lease Accounting Page

All of AICPA’s resources on the new lease accounting standards, including a practice aid, an implementation plan, an accounting brief, and webinars. Also provides links to articles in the Journal of Accountancy and the Center for Plain English Accounting.

Visit AICPA website.

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Learn More about the New Lease Accounting Standards

White Papers, Handbooks, and Research Studies

Transition Accounting eBook

Transition Accounting eBook

| Accounting, Guides | No Comments

With the deadlines for the new lease accounting standards approaching quickly, many companies are asking how software can help automate the tasks required for the transition period. US GAAP filers adopting ASC 842 will be required to provide three years of comparative reporting.

Asset Level Lease Accounting White Paper

Asset Level Lease Accounting White Paper

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Learn the differences between contract-level and asset-level lease accounting in this technical white paper. Review examples of the impact of asset-level decisions, judgments, and events for material handling, data center, and IT equipment.

Lease Accounting Cost Savings

Lease Accounting Cost Savings eBook

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Considering lease accounting software to comply with the new FASB or IFRS standards? Download this eBook to understand the potential time and cost savings opportunities resulting from automation of lease classification and financial reporting.