The first step in compliance for many companies following the US Financial Accounting Standards Board’s (FASB’s) issuance of its new leases standard on Thursday will be an evaluation of whether they possess all the data they need to report under the new rules.
FASB’s Accounting Standards Update No. 2016-02, Leases, will require lessees to report obligations for operating leases on the balance sheet for the first time.
Currently, many companies are using spreadsheets for their lease accounting. Leasing under current US GAAP is a “set it and forget it” model, said PwC’s Sheri Wyatt, CPA. She said that under current US GAAP, companies determine their straight-line expense today, feed it into their accounting system, and move forward with no reason to make changes over the period of the lease.
Adding a lease liability that may require reassessments more frequently creates a new layer of complexity. While Wyatt said it’s “debatable” whether spreadsheets still will suffice for accounting under the new standard, she is certain that companies will need to evaluate closely whether all the data they need exist in their spreadsheets or other repositories.
“What [spreadsheet accounting] creates is potentially some data gaps and even data quality issues in terms of what the actual lease may say and what may reside in the actual spreadsheet,” said Wyatt, a managing director for capital markets and accounting advisory services for PwC. “So what we’re finding companies start to think about is, ‘Do I have all the right data? And if I don’t, how should I go about getting that data so I can ensure compliance?’ ”
Here are four key considerations that Wyatt recommends for companies as they work to comply with the new leases standard:
- It’s time to update lease inventories. “Many companies have disparate systems for tracking, monitoring, and housing lease agreements,” Wyatt said. Information on a company’s leases may reside in different types of files on different hard drives, multiple filing cabinets, and, of course, spreadsheets throughout the company. Lease data may be spread across different business units and geographies. Getting a handle on all of a company’s leases, wherever they are, is an important step in compliance.
- Transparency is a key. Bringing operating leases onto balance sheets could make a significant difference in the numbers a company is reporting. Having early conversations with stakeholders such as the board of directors, investors, and lenders about the potential impact of the new standard will be beneficial, Wyatt said. Evaluating and discussing the impact of the changes on debt covenants may be an important part of the process. “Particularly if you’re starting to renegotiate or enter into new credit agreements, having that information sooner rather than later may help with those negotiations,” Wyatt said.
- Ability to identify cost savings. Analysing the impact of the standard on balance sheets and profit and loss statements may cause companies to come to different decisions about whether to lease or purchase certain assets such as real estate or equipment. This also may be a good time to look at lease procurement processes, which could reveal enhancements that could generate cost savings. By having all of the lease data centralised, a company can perform data analytics to identify cost synergies through consolidation of vendors or make timely decisions at the end of a lease term. If a company has similar leases with multiple vendors, there may be an opportunity to consolidate and contract with just one vendor for a lower price.
- Operating under different rules. FASB’s standard is not converged with that of the International Accounting Standards Board. This may create challenges for multinational companies. “The ideal would have been for the standard to be converged,” Wyatt said. “And the fact that it’s not is going to result in companies having to enhance their systems and accounting policies for multiple GAAPs.”
—Ken Tysiac (firstname.lastname@example.org) is a CGMA Magazine editorial director.