Timing of Adoption of Revenue, Leasing Rules Becomes Issue

By Denise Lugo

March 4 — Now that the Financial Accounting Standards Board has issued its new leasing standard, companies should begin reevaluating their implementation plans in conjunction with the new revenue rules to determine if it is more feasible to adopt both rules simultaneously, or stagger the implementation process, practitioners told Bloomberg BNA.

Whether companies should adopt the new rules for revenue and leases as part of single, “big bang” process or stagger their efforts would vary, depending on their particular situation, practitioners said.

“It depends on the company; it depends on the resources; it depends on how much effort they plan to put in in-house versus hiring third party consultants to assist,” PwC's Dusty Stallings told Bloomberg BNA March 4. “So it's a company-by-company decision to a great extent,” said Stallings, a partner in PwC's capital markets accounting and advisory services.

Other practitioners agree and advise that companies should assess impacts of both standards so they can determine the best adoption course.

“If there is a low level of impact on systems, processes and controls from one or both standards, concurrent adoption may not be as challenging as sequential adoption.”

“If there is a low level of impact on systems, processes and controls from one or both standards, concurrent adoption may not be as challenging as sequential adoption,” KPMG LLP's Dean Bell told Bloomberg BNA March 2.

Companies should consider resource limitations and constraints. They should gauge their organizational tolerance to manage the accounting-change process multiple times, said Bell, his firm's new leases standard implementation lead partner. “They should determine if their organization can absorb a ‘big bang' approach more readily, or take on one project at a time, which requires consecutive years of financial statement recasting,” he said.

Anxiety Heightened

The rules were issued by FASB two years apart, and take effect one year after the other. Revenue from Contracts with Customers (Topic 606) was issued May 2014 . Its effective date is 2018 for public companies, but the rule allows for early adoption in 2017—the initial effective date before a deferral was granted.

Leases (Topic 842) was just issued Feb. 25, 2016 . It's effective in 2019 for public companies, but early application is allowed.

There's a level of anxiety about the work that has to be done, and that anxiety was heightened with the issuance of leases because it is the same group of people that have to work on both, practitioners told Bloomberg BNA.

Central Overlap

For some sectors—given the central overlap between revenue and leasing—adopting the rules at the same time makes sense, but that would be dependent on a company's resources, and it comes with its own set of challenges, PwC's Sheri Wyatt told Bloomberg BNA March 4.

Healthcare and pharmaceutical sectors will likely be affected heavily by both revenue and lease accounting and could potentially benefit from thinking of simultaneous adoption, said Wyatt, the firm's managing director in its capital markets accounting advisory services. “And the reason why I think there's a bit of an overlap is a lot of times those organizations not only sell their equipment or services, but they also lease their equipment to their customers,” she said.

Oil and gas are other industries likely to be affected by both standards.

In comparison, sectors like retail and consumer that are going to be heavily affected by the leases standard aren't expecting huge differences from a revenue perspective, Wyatt said. “And so that's where they may be able to manage their resources and their implementation where they're able to address revenue recognition first and then move onto leasing—they may not necessarily have to adopt this simultaneously,” she said.

Most Firms Won't Early Adopt Revenue

So far, companies have indicated that they will wait until the actual effective date before they adopt the revenue standard. Very few firms plan to early adopt it, practitioners said. “I would venture to say the vast majority of clients will adopt when it's mandatory for them in 2018,” Deloitte & Touche LLP's Bryan Anderson told Bloomberg BNA March 1. “The real question—and we won't know until 2018—is what adoption method companies will choose,” Anderson, a partner at the firm, said.

Whether they restate the prior years in their core financial statements—required under the full retrospective method—or report under both sets of guidance in 2018 under a modified retrospective method—which provides historical unaudited information—is highly discussed and debated, said Anderson.

“And there are tremendous amounts of pros and cons with either one depending on companies' organizational structure, the actual accounting impact and, quite frankly, the amount of time companies have left to realistically implement system changes,” he said.

Don't Underestimate Leasing Preparations

In terms of leases, companies shouldn't underestimate—particularly those in the retail sector—the massive task of adopting a standard like lease accounting, practitioners also said.

Furthermore, they caution against companies waiting until the effective date to adopt the rules. “It's going to be huge,” said William Bosco of Leasing 101, a leading industry consultant whose primary client is the equipment finance and leasing association and who works as their accounting adviser on the leases standard.

“In doing analysis, I looked up the 10-K of Walgreens, and they had 8,400 store locations that they rented, and since then they've announced a merger with Rite Aid and a merger with Boots, which is a U.K. equivalent to Walgreens, so they've got a huge number,” Bosco told Bloomberg BNA March 1.

Bosco said feedback he's gotten from clients indicates an hour will be needed just to read and extract the terms of one real estate lease. “Many leases are gross leases, meaning that the payment covers not only the rental of the space, but things like utilities, taxes, insurance—common area charges,” he said.

That is the chore with every one of these leases, Bosco said. “It's to read them, get the total payment spread, but then find out from the landlord and research as to how much of those payments are lease payments and how much are nonlease payments,” he said.

To contact the reporter on this story: Denise Lugo in New York at dlugo@bna.com

To contact the editor responsible for this story: Steven Marcy at smarcy@bna.com