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Time is running out for companies that haven’t started preparing to adopt a new accounting standard for leases.
That was a recurring message from accounting leaders May 17 during a lease accounting conference sponsored by Deloitte LLP and Bloomberg Tax in Washington.
“Now is the time to get going,” said Kevin Vaughn, senior associate chief accountant with the Securities and Exchange Commission.
In addition to choosing software, companies also need to collect data from their lease documents and make accounting policy decisions, Vaughn said. He encouraged companies to work on all three at the same time in order to meet the January 2019 adoption deadline.
About 16 percent of those in attendance said they hadn’t begun planning for the leasing standard, according to a survey of conference attendees.
Roughly 80 percent said their company was assessing or in the middle of implementing the standard, which will require companies to include lease obligations, and assets, on the balance sheet for the first time.
Just a handful said they had adopted the leasing standard or had completed their preparations and were ready to adopt.
Until now most companies have used a simple Excel spread sheet to keep tabs on the rough value of leased buildings, vehicles and even IT equipment—everything from river barges to high-end retail stores to jet planes.
“It is time to act,” said Tim Hutchens, executive vice president with CBRE Group Inc. He leads the real estate firm’s federal lessor advisory group.
The change in accounting will ripple across a business to divisions outside the accounting department and across the globe. Staff who handle leases will have to change how they enter, store, and track those documents.
“Looking in the rearview mirror, knowing the effort it took, I would probably say, I would be a little bit, maybe not quite panicking, but my anxiety level would be up if I had not started,” said Alica Jolla, general manager of corporate accounting for Microsoft Corp. The software giant adopted the leasing standard last summer, more than a year earlier than required.
“Don’t underestimate the amount of time that it’s going to take,” Jolla said.
Attendees said they consider reviewing all of their contracts the most difficult aspect of implementing the new leasing standard. Nearly half surveyed said they would rely on existing staff and resources to adopt the standard.
The SEC’s Vaughn also encouraged companies to take questions about accounting judgments to the SEC before the standard takes effect.
“Our doors are open,” he said.
The office of the chief accountant considers the changes to the lease accounting standards a priority and they offer both informal and formal reviews to help companies comply with the standard, Vaughn said.
The Financial Accounting Standards Board also has a similar consultation process, said former board member Larry Smith. Questions and concerns that companies identify during the first few years after a new standard comes online can sometimes result in additional guidance from the board.
Smith encouraged companies to communicate with FASB throughout the transition.
Smith also defended the inclusion of a bright line to separate operating from finance leases.
“People need something to fall back on to support their judgment,” he told the conference.
“I wanted to make sure that there was something in there that allowed people to easily determine whether you have an operating or a finance lease,” Smith said.
The new standard requires both types of leases to be detailed on the balance sheet, eliminating any economic incentives to structure contracts so they would meet the threshold of an operating lease, he said.
Implementation guidance issued by FASB retained the guidepost that accountants were familiar with: If the company pays more than 90 percent of the fair market value of the leased asset, it’s a finance lease, Smith said.
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