As the Financial Accounting Standards Board's new version of lease accounting, which could add half a trillion dollars in liabilities to corporate balance sheets, moves closer to adoption, a study just released by Deloitte finds that only 7% of companies say they are "very prepared" for the changes. Final approval of the standard is expected later this year and implementation in 2014 or 2015.
That proportion may be "so low because many are waiting until the standard is finalized," says Josh Leonard, a partner in Deloitte's financial advisory services practice.
Waiting might not be such a good idea, Leonard warns, especially for companies that do substantial leasing of property or equipment. It would be smarter to begin preparing pro forma balance sheets, P&Ls and cash flow statements, he says. These companies should also start thinking about new or updated software for tracking and accounting for leases under the new standards, although that won't be available until the rules are finalized, he notes.
"This is a kind of mini-Y2K thing," says Leonard. "Depending on the final effective date, there will be a rush to get software companies to provide up-to-date software for handling the new standards."
David Schmid, a partner in the accounting and financial reporting practice at PricewaterhouseCoopers, suggests that "to some extent, it may be wise to wait, because the standard-setters are still meeting." At the same time, there are "certain baby steps" worth taking, such as "staying on top of and monitoring the changes that are coming, so there are no surprises," he says.
Schmid recommends educating "key stakeholders," both inside and outside the company: the audit committee, board members and the CFO, but also analysts and investors. "It's widely known that this change is going to shift a lot of leases from footnotes to the balance sheet," he says, "but you need to make sure that analysts and investors are aware in advance of the magnitude of that shift."
PWC recommends that in advance of the new standard, companies assess the potential impact by cataloging existing leases and gathering data about lease terms, renewal options, payments and embedded leases, paying special attention to the tax effects of the change. "For some global companies, just getting their arms around all the leasing data could be a challenge, if it's not centrally available," Schmid says.
After reviewing their balance sheets and P&Ls, some companies may decide it makes more sense to buy than lease. If they were using lease buybacks to get assets off the balance sheet, they may want to revert to owning, Schmid suggests.
Leonard and Schmid agree that companies should also review their debt agreements with lenders and credit agreements with suppliers.
"If the changeover significantly changes your debt ratio, some lenders may say, 'Oh, that's just an accounting change,'" Leonard says. "But others could say, 'Hey! The debt covenant is violated. We want to renegotiate the terms.'"
But Schmid notes that for companies with strong credit ratings, the change, by putting them outside the terms of their debt covenants, "could provide an opportunity to renegotiate more favorable terms."
To read more about the new standard, see Leases on the Books?