Oil, Gas Firms, Manufacturers Worry Most About Lease Readiness

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 Steve Burkholder

Top managers at oil and gas companies and consumer and industrial product makers lead the executives worried they won’t be ready to meet the deadline for new lease accounting rules, accounting firm Deloitte LLP found in poll results July 31.

Retailers, health care providers—such as hospitals—and media and entertainment companies round out the roster of business sectors where 52 to 56 percent of corporate executives showed concern about using the standards by their Jan. 1, 2019, effective date for public companies.

More than 47 percent of C-suite and other corporate executives registered such worries, the Deloitte survey found.

Lease accounting experts at such companies as General Electric Co. and IBM Corp. in recent weeks have pointed out myriad tasks—some involving major computer system changes—entailed in complying with the rules, ASC 842, which the Financial Accounting Standards Board issued in 2016. They urged companies to start preparing for the advent of the accounting standard.

Rule to Swell Balance Sheets

The balance sheets of airlines, retailers, telecom companies, many banks, hotel and restaurant chains, and other companies will swell under the new accounting rules, according to studies by groups such as the Equipment Leasing and Finance Association (ELFA).

Under new standards, including similar ones by the International Accounting Standards Board, companies must put on their balance sheets—and not simply in their financial-statement footnotes—what could be billions of dollars in lease liabilities.

Deloitte’s Sean Torr, managing director of risk and financial advising, said that “long lead-time activities”—including information technology improvements and data collection and checking—appear to be bigger tasks than many companies anticipated.

The large number of corporate managers still voicing concern about the shift “half-way into the three-year preparation window” signals how complex the switch is, Torr said in a prepared statement.

Hours of Work on Single Lease

A retailer such as Walgreens has about 8,000 real estate leases for stores and warehouses, William Bosco, chief of Suffern, N.Y., consultancy Leasing 101, told Bloomberg BNA July 31. That figure predates the merger of Walgreens and U.K. pharmacist Boots, he said.

“It may take two hours to extract the information from a single real estate lease,” said Bosco, who has worked as an accounting consultant for ELFA. With numbers soon to appear on balance sheets when they hadn’t in the past, companies will have to separate service-type contracts from those that have to be accounted for under the 2016 standard.

“In order to capitalize them, they have to read every lease and have to extract every item from that lease with an accounting impact,” Bosco said.

Oil and gas companies and utilities already confront a potentially huge work load in evaluating the thousands of land easements that they entered for pipelines across property in private hands. Some are decades old and have little easily retrievable paperwork. FASB is studying possible guidance on the easements issue.

Digging Into Equipment, Real Estate

Many thousands of U.S. companies, including retailers, face deep looks into legal agreements on their use of such items as delivery trucks, warehouse forklifts, cars for sales forces, office equipment and telephone systems, along with their real estate leases, Bosco said.

Hospitals, for example, must study agreements for use of sophisticated diagnostic and other medical equipment, he said.

To contact the reporter on this story: Steve Burkholder in Norwalk, Conn. at sburkholder@bna.com

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

Copyright © 2017 Tax Management Inc. All Rights Reserved.

Request Financial Accounting