Building the Project Team
One of the first steps on your project will be to identify who should be on your lease accounting project team. You will also need to decide who should lead the project and who should be the executive sponsor. At most large organizations, real estate is managed by a centralized group at headquarters along with office managers at various facilities. Equipment leases are trickier as these assets are owned by many different stakeholders across the business.
How long will it take to to comply with the new accounting standards? Estimates vary from 6-12 months to 12-24 months. The real answer is that you won’t know until you get started and get knee-deep into the analysis. In our experience the project implementation time frame will be influenced by the current state of your lease accounting; the complexity of your equipment leasing program and the availability of key stakeholders to participate in the project.
Creating a Project Plan
You will need to define the project team, gain executive sponsorship and budget approval. Then you will need to conduct a business process assessment, understanding your current and desired future state. Next you will need to define requirements for systems, issue an RFP and select a software vendor. The longest part of the project will be the implementation which requires populating a database of all the leasing information needed to generate proper accounting. Finally, you will need to train all the users; communicate to employees; and then rollout the new systems, controls and processes.
Making a Business Case
For most organizations with large real estate and equipment leasing portfolios, the level of effort required to comply with the new lease accounting standards will be considerable. Project teams will need to estimate the costs for business process re-engineering, software licenses/subscriptions and technical implementation. The good news about the lease accounting standards is that unlike many costly compliance initiatives, there is an opportunity to save money during the implementation process. At most companies, real estate and equipment leasing processes have been sorely neglected with understaffed teams, antiquated systems and poorly governed controls. By re-designing business processes; upgrading software applications and implementing stronger policies, companies can save millions annually.
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Download our new Lease Accounting Handbook to learn:
Who to put on your project team
What documents you’ll need to collect
What software changes will be required
How to address your international leases
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Understanding the Business Impact of the New Lease Accounting Standards
Listed companies using IFRS Standards or US GAAP are estimated to have around US$3.3 trillion of lease commitments; over 85 per cent of which do not appear on their balance sheets.International Accounting Standards Board
Our research shows that the average company will see a 13% increase in EBITDA and a 22% increase in interest-bearing debt...the average expected increases for retail business are 41% and 98% respectively.James Chalmers, PwC’s UK assurance leader
These new accounting requirements bring lease accounting into the 21st century, ending the guesswork involved when calculating a company’s often-substantial lease obligations.Hans Hoogervorst, IASB Chairman
The new lease accounting standards were under development for a period of 10 years. A joint project between FASB and iASB multiple exposure drafts were issued with extensive public comments. Before FASB’s ASU 2016-02 and IFRS 16, lease accounting rules had not been updated in 40 years. The original rationale behind the standards were to protect everyday investors from potentially misleading financial statements.
Top Business Risks
With these new assets and liabilities, financial metrics such as Return on Assets, EBITDA and operating leverage could change significantly for some companies. How will shareholders, bondholders, lenders and credit rating agencies respond to these changes? Will these new liabilities on the balance sheet impact corporations ability to borrow money? Or their existing debt covenants? Will these accounting changes impact market capitalization or stock price?
Financial Statement Impacts
With the introduction of the new lease accounting standards, several trillion dollars worth of assets and liabilities will transfer onto corporate balance sheets over the coming years. How will those new assets and liabilities impact the financial metrics that institutional and retail investors use to evaluate the financial performance of publicly traded companies? How will these new accounting rules impact Asset Turnover, Return on Assets and Quick Ratio?
Fortune 500 – Who is Most Impacted?
According to the International Accounting Standards Board (IASB), listed companies are estimated to have around $3.3 trillion of leasing commitments over 85 percent of which are off balance sheet. Leasing obligations for a specific company can range from a few million dollars (on the low end) to tens of billions of dollars (on the high end). For example, Walgreens and AT&T each have over $30 billion in operating leasing obligations, while Hershey and Harley Davidson each have only a little more than $50 million in operating leases.
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Top 10 Guides and Resources
A wealth of excellent documentation has been produced on the technical accounting aspects of the new lease accounting standards. The boards (FASB and IASB) have each published impact analysis studies and detailed accounting examples in addition to the actual standards documentation itself. Each of the Big Four (PWC, EY, Deloitte and KPMG) have also published excellent perspectives and discussion documents as well as guides to interpret the standards.
The deadline for applying the new standards is the end of 2019. However, actual deadlines will vary depending upon your fiscal year. For companies whose fiscal years end on December 31 the deadline will be in 2019. For companies whose fiscal years end March 30, June 30 or September 30 the respective dates in 2020.
The SEC will require historical reporting during the transition to the new standards. Two prior years for balance sheets. And three prior years for income statements. That means some companies will need to start tracking leases under the new rules as early as January 1, 2017.
Learn More about the New Lease Accounting Standards from Other Respected Industry Leaders
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.
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.
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.
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.)
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.
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.