Pharma Firms Fear Software Shortfalls May Derail Lease Accounting

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By Denise Lugo

Pharmaceutical companies, concerned that software vendors won’t be ready with products in time for new rules on accounting for leases, are seeking to delay those rules for a year.

Merck & Co. Inc., Bristol-Myers Squibb Co., Eli Lilly & Co., and six other companies, told U.S. accounting rulemakers that the unavailability of fully compliant software solutions is seriously impeding their ability to comply with the standard.

A Financial Accounting Standards Board spokesperson told Bloomberg Tax there is no plan at this time to revise the effective dates of the leases standard. “The FASB is assessing the letter and the concerns raised in it,” the spokesperson said in an email,

Without fully compliant software, companies have to do numerous manual workarounds, which are time consuming and costly, the firms said in a January letter to FASB.

Complex, Time Consuming

“The amount of time they gave to companies to comply wasn’t long enough for software vendors to understand the rules, understand the various types of leases, create programs that will capitalize those leases, and account for those leases considering all of the things that could happen to a lease,” William Bosco, president of consulting firm Leasing 101, in Jupiter, Fla., told Bloomberg Tax. “It’s a question of complexity and time.”

“The rule was only issued in 2016,” said Bosco. “The prescribed accounting for operating leases is complex and leases are varied and complex.”

The new leases rules, Accounting Standard Codification 842, require companies to ready their balance sheets to record leased assets and liabilities they previously didn’t have to. The changes will enable investors to see the contractual obligations that companies have.

Currently, most companies account for lease portfolios in a decentralized manner using end-user computing spreadsheets like Excel models to determine what to disclose, according to the Jan. 11 letter, which was also signed by Abbott Laboratories, Teva Phamaceutical Industries Ltd., Zimmer Biomet Holdings Inc., Zoetis Inc., Endo International Plc, and Celgene Corp.

Practitioners said the workarounds are time consuming because of some large lease portfolios have extensive data inputs and disclosures.

“For much information that is not being captured now in Excel worksheets that many companies use, companies will have to build it out in Excel, wait for new software to get it, or internally develop manual work arounds,” Peter Vinci, a consultant at Resources Global Professionals in Charlotte, N.C., told Bloomberg Tax. “These new Excel or manual initiatives will ultimately be throwaways once the new lease software is developed, tested and rolled out to companies.”

Major Implementation Costs

To implement the rules, the vast majority of companies have to install new systems they’ve never installed before. That can be costly.

Implementation costs range from as low as $300,000-$400,000 to a multimillion dollar arrangement, David Shebay, principal at PricewaterhouseCoopers LLP, told Bloomberg Tax.

The majority of system implementation costs will be from $750,000 to $3 million. More complex arrangements may range from $3.5 million to over $5 million, Shebay said. “However, extremely complex implementations could be significantly higher,” he said.

Costs to adopt the rules are driven by a company’s business requirements and the systems selected. Three factors drive the costs:

  •  the type of system a company chooses—whether cloud or on premise;
  •  the amount of customization that’s required; and
  •  the number of integrations with the company’s enterprise resource planning (ERP) process.

Trouble With Embedded Leases

Accounting complexity can also drive costs, practitioners said. The pharmaceutical companies seeking a deferral also asked FASB to clarify rules related to embedded leases, or remove the guidance from the scope of the leasing rules. The changes or removal would help make implementation efforts easier and less expensive.

Company accountants and those that audit them are finding it difficult to determine a logical, repeatable routine and cost-effective method to determine the fair value of an embedded lease, the companies said.

Arrangements pharmaceuticals have are complex, accountants told Bloomberg Tax. “Certain embedded leases issues are unique to them given the arrangement they typically enter into,” PwC partner Sheri Wyatt said.

Areas companies must examine in accounting for embedded leases include identifying whether an arrangement contains an embedded lease, then allocating them between the lease and non-lease elements based on their relative standalone selling prices, Wyatt said. “And that’s where the challenges start to arise,” she said.

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

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

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