New lease accounting standards issued by FASB and IASB are about to shine a bright light on your leasing practices. But rounding up the data needed to complete the soon-to-be mandated reporting on your lease agreements is no small task. Is your company ready?
According to the new regulations, companies must report nearly all operating leases on their balance sheet. This is a major change from past practice, which included capital leases on the balance sheet but reported operating leases in the footnotes of corporate financial statements – what’s known as “off balance sheet” reporting.
In the wake of high-profile collapses such as Enron and WorldCom, regulatory agencies realized that off balance sheet reporting of operational leases made it hard for average investors to understand a company’s actual debt. Because they were not reported on the balance sheet, leases were not included in key financial ratios, such as return on assets. To promote financial transparency, FASB and IASB announced the new standards last year.
When the new standards take effect, companies with leases of more than 12 months – for buildings, equipment, and other assets – must capitalize and report those leases as assets and liabilities on the balance sheet. This reporting requires additional qualitative and quantitative details. For most organizations, the effort to compile the original lease data for hundreds or thousands of leased assets will be huge.
Compliance will require new accounting and financial reporting practices, technology solutions, and changes to the budgeting and operational functions. Yet most CFOs aren’t exactly sure how to get started or what the final cost will be. In a recent KPMG study, 92% of respondents say they will need to upgrade their IT system or invest in new technology to meet the mandates. Only 56% of these finance executives say they can realistically estimate implementation costs.
It’s a process, not a project
One thing is for sure: The clock is ticking. Although the effective date for the new reporting is 2019, most companies don’t have that much time.
In the U.S., for example, the SEC requires companies to prepare balance sheets that help investors easily compare the results derived by using both the old reporting method and the new approach. Organizations must deliver two years of historical reports for their balance sheets and three years of historical reports for income statements. For some companies, the first comparative income statement may be due as early as the end of 2017.
In fact, however, taking maximum advantage of the new lease accounting standards is a great opportunity to improve visibility into your lease accounting practices while gaining efficiency and productivity through better lease-agreement management.
A good place to start is the e-book “Are You Ready for the New Lease Accounting Standards?” from IBM and KPMG, which helps you determine the time, attention, and resources you will need to prepare. You’ll have a better grasp of how to determine the best approach for your organization, get executive buy-in and build the right team, evaluate technology and resources, and realize benefits beyond compliance.