What Microsoft, Bristol-Myers Can Teach on Lease Adoption

The Financial Accounting Resource Center™ is a comprehensive research service that provides the full text of standards, the latest news from the Accounting Policy & Practice Report ®,...

By Amanda Iacone

Involving auditors and stakeholders across the company plus prioritizing which leases to scrutinize are among the steps that Microsoft Corp. and Bristol-Myers Squibb Co. leaders say are crucial to adopting a new lease accounting standard.

The executives spoke with Bloomberg Tax about their companies’ experience preparing for the new standard. Starting in January 2019, companies will have to detail for the first time how much they owe in lease obligations on their balance sheets.

Until now, just a fraction of leases obligations made it onto corporate balance sheets and companies kept tabs on their other lease costs using a simple spreadsheet. Companies are digging through contracts and agreements of all stripes and languages to determine whether they meet the new definition of a lease and what costs might be added to the balance sheet. But some haven’t started yet.

Microsoft brought $6.6 billion in lease obligations onto its balance sheet when it adopted the standard last summer, more than a year earlier than required.

Alice Jolla, general manager of corporate accounting, said that Microsoft’s chief finance and accounting officers decided to adopt the standard at the same time as it adopted another major accounting change—revenue recognition.

Why Adopt Early

The decision to jointly adopt both standards meant that the company needed to recast its financial reports just once. Dual adoption also enabled the company to streamline the process as they worked with many of the same staff in investor relations and other parts of the business, Jolla said.

Early adoption of the leasing standard also gave the company’s accounting team more time to adjust to the principles-based standard and the accounting flexibility that comes with it.

“Having to make those judgment calls and interpret the standard is something that the registrants are going to have to get used to,” Jolla said. “The more muscle you begin to build operating in a principles world is also a benefit.”

She encouraged companies to work through the technical interpretations and accounting judgments while at the same time they also pick a vendor and build out any software systems.

Critical Communication

Jolla recommended over-communicating as companies launch any major standard. She said companies should involve key stakeholders so those individuals understand the process and how the changes might affect a company’s financial report.

“Bring your auditors along in the process,” Jolla said, so they understand what accounting policy decisions were made and why.

Peer groups and resource groups that work with the Financial Accounting Standards Board can also be a good resource, she said.

It Takes a Team

Microsoft had a core team dedicated to shepherding the project to completion. But more than 25 others were also involved. She stressed that companies have to name “someone dedicated, in charge, with executive sponsorship to keep things moving along.”

“You have to devote the resources,” she said.

Bristol-Myers Squibb has a team of 25 to 30 people running its lease accounting project but more stakeholders were involved early on, said Sima Basher, associate director of corporate consolidation and finance reporting.

Additionally, the pharmaceutical company purchased software and hired outside help to comb through its leases, service agreements and other contracts and to pull the relevant financial details. Basher expects the company will spend around $1.5 million once the project is complete.

A Material Shift

Weeding through leases is among the top challenges for companies as they adopt to the standard. Basher’s advice: “Just be practical.”

“You do have to consider the concept of materiality and what it means to your organization, what is an acceptable threshold for you,” Basher said. “Once you have that, you can weed out certain items that won’t hit that.”

For Bristol-Myers, the company determined that its leased printers—worth more than $4 million worldwide—wasn’t significant enough for investors to consider compared to the $33 billion in total assets that the company reports on its financial statement. Real estate represents the bulk of its lease exposure and so that’s where they are focusing, Basher said.

Bristol-Myers will still track its fleet and IT equipment and review the value of those leases annually in part to keep tabs on any major shifts in obligations. That will also help their auditors be comfortable with their decision to leave some equipment out of the equation, she said.

In addition, the company is also triaging its service arrangements—like manufacturing agreements—and focusing on high-dollar contracts and more complex contracts that are more likely to fall under the leasing standard.

“We have thousands and thousands of contracts. We can’t focus on every single one,” Basher said.

To contact the reporter on this story: Amanda Iacone in Washington at aiacone@bloombergtax.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bloombergtax.com

Copyright © 2018 Tax Management Inc. All Rights Reserved.

Request Financial Accounting