In February 2016, the Financial Accounting Standards Board issued ASU 2016-02 Leases (ASC 842). ASC 842 brings most leases onto the balance sheet creating a right-to-use asset and a lease liability. The new standard will also require additional disclosures.
Unlike the recently implemented standard on revenue recognition, the new lease standard is not difficult to understand. However don’t be lulled into a false sense of security.
As Alice Jolla, General Manager of Corporate Accounting at Microsoft, said at a recent conference for the lease accounting standard sponsored by Deloitte LLP and Bloomberg Tax, “the devil is in the detail.”
Collecting the data necessary to implement the standard is going to be an enormous task that each company must tackle.
Initially, companies will need to identify the complete population of their leases. This may be easier said than done especially for identifying embedded leases in service contracts.
Another challenge will be selecting the proper software vender. For companies choosing early adoption of the new standard, the software may still be in the development stage. Companies should select software that is compatible with their current systems and will be adaptable for the companies’ future needs.
There must also be a consideration into how the lease data will be entered into the new software. International companies will need to deal with the exchange rate of foreign currency. Modifications of existing leases raise additional challenges. How should companies confront these issues?
The consensus is to start early. Determine what external resources will be needed. An internal working group of all stakeholders should be brought together early, with each member knowing their role. Implementation of the new standard will be a time consuming and costly process.
According to another speaker at the conference, Brandon Coleman, the FASB tried to make the new standard as easy as possible. The board changed very little about the classification of a lease as an operating lease or a finance lease from existing lease accounting. They also eliminated the need to restate your lease liability for changes in the market rate. Lastly, the FASB permitted a modified retrospective transition from the date of implementation thus eliminating the need for restatement of prior periods.
To summarize, identifying the entire population of leases and collecting all the necessary data may prove to be the most significant challenge when implementing the new lease accounting standard.
Public companies with a Dec. 31 fiscal year end still have just seven months before the new standard becomes effective.
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