Leases case study: How J&J prepared a global inventory

Creating an inventory for all leases is one of the first actions experts say companies should consider in preparation for the converged lease accounting standard proposed by the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board.

Johnson & Johnson (J&J), the global health care products company, has received two distinct benefits from creating its inventory of leases, J&J global lease implementation project leader Judy Ryan, CPA,  said on a KPMG webcast Monday.

First, the company has been able to perform high-level modelling to understand some of the impacts the proposed changes would make on its financial statements.

Second, creating a lease inventory has given J&J transparency into its leases, allowing evaluation of potential decisions that could create future business advantages if the proposal is approved.

“Now that we have this inventory,” Ryan said, “corporate is now proactively trying to understand why certain items could be leased versus bought, and … if we should continue to lease certain assets, or if it’s more economical to buy in the future, or potentially structure contracts that could land us out of the scope of the proposal.”

The boards’ proposal on leases faces an uncertain future. Although the boards have noted support from investors for placing leases on the balance sheet, the boards have acknowledged that a wide variety in the types of leases made it difficult to create a one-size-fits-all approach.

The result has been a dual-recognition approach where lessees would treat most equipment and vehicle leases differently from most real estate leases. Comment letters are due September 13th, and KPMG Global Leases Topic Team member Kimber Bascom, CPA, said the letters received by the boards so far largely indicate dissatisfaction about complexity, costs vs. benefits, conceptual considerations and differences between lessee and lessor accounting.

Nonetheless, the boards have indicated that they hope to have a final standard in place in 2014, with an expected implementation date not earlier than fiscal years beginning on or after January 1st 2017.

“My prediction is that this will go forward,” Bascom said during the webcast. “I think [getting it done in 2014] is going to be a significant challenge. But I think they will push very hard for that.”

J&J has been getting ready for a new leases standard for more than three years. The company operates in a decentralised manner, Ryan said, and wanted to create a common platform and process to obtain and maintain all leases.

But creating a central repository for thousands of leases across hundreds of reporting units in 60 countries was not easy.

“This is a substantial undertaking,” said Ryan, a manager in J&J’s worldwide financial compliance and procedures group. “Given the size of the task and the number of business units we have, we have invested thousands of hours between the planning, designing, communication, data-gathering and reconciliation processes.”

J&J started by selecting a technology solution to gather the necessary data and developed a phased approach to onboard business units. The company started working with a few business units, then gradually increased the number until every unit had made the transition.

Some actions that helped during the process included:

• Receiving support from senior management around the importance of creating the inventory.
• Informing personnel about the proposed lease accounting changes – so they would understand why the data were being collected – in addition to training them to use the tool.
• Leveraging existing information in systems already in use. J&J saved time by uploading some of the data points needed rather than inputting them manually.

The full inventory was completed by the end of 2012. The inventory includes all data points required for the right-of-use asset and liability calculations that would be required by the proposed standard. J&J has tested the accuracy and completeness of the data submitted by reconciling back to its accounting records.

And in 2013 and beyond, J&J plans to continue testing the data and having business units keep up the central repository by inputting changes or additions that would affect calculations moving forward. In addition, the company will perform comparative modelling to gauge the impact on the financial statements if key functions or scenarios change.

“Obviously, we’re going to evaluate some business opportunities as well with our lease inventory to see if we can get business decisions today in preparation for the future,” Ryan said.

The J&J approach may not be for everyone, particularly with the uncertainty surrounding the standard.

“There are different responses that companies can have to where we are in the standard-setting process, and different companies will have different organisational impacts,” KPMG Accounting Change Services lead partner John McGaw, CPA, said on the webcast.

Nonetheless, Ryan said having completed the substantial work of creating a central repository has J&J prepared for potential changes in lease accounting standards, and it could result in other benefits.

“We wanted to see if there were opportunities to enhance or streamline our current lease administration process and create any accounting change processes as a result of that,” Ryan said. “We believe that creating one process for the enterprise will ensure consistent application of reporting going forward.”

—Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine senior editor.