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Under the Financial Accounting Standards Board’s new lease accounting rules, organizations are required to recognize most leases on-balance sheet – which may significantly impact financial reporting and processes. Effectively, lessees will appear more asset-rich, but also more heavily leveraged. In some cases, companies may want to minimize the extent to which the balance sheet grows.
To begin answering questions about impacts, companies should start gathering data about the size and population of their leasing contracts, and digging in to have a comprehensive understanding of their transactions. For many organizations, this will be an extensive process—and now is the time to get started on assessment and implementation.
As a first step, organizations should ensure their appropriate accounting, finance, and operating personnel receive training around the new requirements so they can evaluate their existing and prospective lease agreements. For many companies, the data gathering process is vast, and companies need to ensure that their teams are trained to understand the scope of the new guidance. Coordination is key, as the standard may have broad organizational impacts beyond finance and accounting, including on operating units, legal, real estate, treasury, IT, tax, budgeting, procurement, regulatory, and forecasting areas, among others.
Naturally, a complete repository of lease data is paramount to effectively apply the new guidance. To collect that data, organizations should develop an inventory of their existing leases. In doing so, companies have an opportunity to re-examine the particulars of their leasing transactions while also evaluating the adequacy of current data capture system capabilities in comparison to future requirements. Companies may wish to renegotiate the terms of some existing leases or take a different approach to the structuring of future leases, and rethink some lease-versus-buy decisions. A thorough understanding of the new standard’s requirements is essential for those purposes.
Additional judgments will be required in determining whether a company’s contracts contain leases. Accordingly, organizations should identify which of their existing transactions will continue to be considered leases under the new guidance, and analyze the implications of the new standard’s requirements on existing systems, processes, and controls for those transactions. In general, most arrangements that are considered leases under current U.S. GAAP, such as typical leases for office equipment or vehicles, will still be considered leases under the new standard – but for different reasons. However, some outsourcing and similar arrangements that are considered leases under current U.S. GAAP will not be considered leases under the new standard. Correctly identifying leases will have a greater effect on financial reporting because this is the new on-/off-balance sheet test.
Under the new standard, increased disclosure requirements about leasing transactions also may necessitate additional preparation for companies during each reporting cycle. Currently, many analysts make adjustments to financial statements to account for off-balance sheet lease obligations. After the new requirements are applied, analysts will be able to see an entity’s own assessment of its lease liabilities. The leasing standard provides a disclosure objective to enable analysts to continue to make adjustments to financial statements. Therefore, as companies are implementing the new standard, it is important to consider the data collection required for the disclosure and be prepared to address new questions from analysts. Look for the totality of the information and the appropriate systems, processes and internal controls to support it.
Finally, it is important for companies to consider the combined impact of recent changes in accounting standards. Some organizations may want to consider adopting the new leasing and revenue recognition standards concurrently, through a single adoption process, since there may be synergies in doing so. An organization’s degree of preparedness will depend on a number of factors, but it is perhaps most important to keep in mind that the key personnel resources needed to support implementation of both standards may be working at their full capacity already.
Although most companies are not required to apply the new leasing standard until 2019, many will find that an early assessment of the new standard’s impact across their organization will help pave the way for a more efficient and effective adoption process while also facilitating the development of a plan for future sustainability.
Kimber Bascom is KPMG LLP’s Global Leasing Standards Leader and Partner-in-Charge of the Accounting Group of the firm’s Department of Professional Practice – Audit. He leads the development of policies on U.S. accounting and financial reporting matters provided to audit engagement teams and clients.
Dean Bell is KPMG LLP’s New Leases Standard Implementation Lead Partner. He assists companies with implementing the new leases standard, which includes applying new leasing guidance and advising clients on U.S. GAAP technical accounting and policy matters.