A new lease accounting standard has handed companies a huge task, but a recent survey by EY and the Financial Executives Research Foundation suggests businesses are already getting to work.

The new standard, issued by the Financial Accounting Standards Board in February, requires companies to include leases on the balance sheet for the first time.

The survey of more than 125 CFOs and other finance executives found that the vast majority are familiar with the new standard, and almost half have taken some steps to begin to prepare, such as assessing the company's readiness or starting to inventory the company's lease data.

But Anastasia Economos, a partner in EY's financial accounting advisory services and the firm's Americas lease accounting change leader, noted that 83% of the respondents have yet to budget funds for the lease accounting effort.

“Going through the budget exercise for a project like this helps you recognize the entire effort you need to do,” Economos said. “When you start budgeting for something, you realize the activities that have to take place.”

Companies in some industries will be more affected by the lease accounting standard than others, she said. “But no one is going to get away with not doing anything if they lease. For most companies that have significant numbers and values of leases, like retailers, this is hard work.”

There are three types of leases: real estate leases, equipment leases, and service agreements with embedded leases. Companies generally have a good handle on their real estate leases, which tend to be worth a lot of money, but many will be starting from scratch when it comes to equipment leases and service agreements.

“On the equipment side, most people don't track information that well at all, and if they do, it's only at the contract level,” said Michael Keeler, CEO of LeaseAccelerator, which provides equipment lease management software.

Keeler noted that a single equipment lease contract can cover multiple pieces of equipment—hundreds of laptops, for example—while the new standard requires companies to account for each piece of equipment separately.

“You need to have the capability not only to track the asset level, but generate the accounting at the asset level,” he said. “It's very different from what people do today.”

Service agreements are another challenge because up until now, companies didn't usually bother to do the analysis that determined whether the service agreement had a lease embedded, Keeler said. For example, a computer hosting agreement might involve dedicated computers.

More than half (54%) of the finance executives surveyed said identifying non-real estate leases would pose a challenge, while 66% cited the task of putting together an inventory of all the data.

Three-quarters (75%) of the executives expect getting through the first-year audit of their lease accounting to be moderately or significantly difficult, and 73% said developing policies, procedures, and controls related to lease accounting would be a challenge.

Companies' efforts to gather data about equipment leases will be complicated by the fact that in most companies leasing is decentralized, with decisions made by executives in the business units, Keeler said. “Typically no one owns equipment leasing in a company, and no one owns the performance of a equipment lease portfolio, the way someone would own real estate.”

Technology Options

According to the survey, about half of companies currently track their leases on spreadsheets, and more than 80% said they are still considering their technology options.

Anastasia Economos, EY Companies considering acquiring new technology “need to think about what the impact will be so they'll be able to assess what tools they need,” said Economos, pictured at left. She suggested that companies look at a sample of their leases to understand what information they need to gather and what technology they could use to support that effort.

The lease accounting changes are hitting companies at the same time they're dealing with changes in accounting rules regarding revenue recognition. The revenue recognition changes go into effect at the start of 2018, while the lease accounting changes take effect Jan. 1, 2019.

Keeler noted that regulators are expected to mandate that companies provide three years of comparable data on leases when the new standard takes effect, and said that should encourage companies to start their preparations. “The longer you wait, the farther you have to go back in capturing that historic data,” he said.

While the lease accounting changes are likely to entail considerable effort, Keeler said, companies could also realize substantial savings by getting a better handle on their lease management processes. With equipment leases, better data and controls could ensure that companies return equipment on time and could help them negotiate the best rates at the start of the lease, he said.

When it comes to real estate leases, companies rarely audit the operating expenses the landlord builds into the lease, Keeler said. “You can save a lot of money just by managing your operating expenses.”

Meanwhile, the survey shows 60% of finance executives expect the changes in lease accounting to have a moderate or significant effect on their balance sheet, and 58% see the changes having a moderate or significant effect on their financial disclosures.

Instant Insights /

New Lease Accounting Standard Poses Challenge for Corporates

Related Stories

Recommended For You