Things You Should Do to Prepare for the Effective Date of the New Leasing Standards--With Limited Time Left to Implement

We are counting down to the effective date for the new lease accounting standards, but if you are not fully prepared for the implementation, don’t worry you are not alone. 

According to Deloitte’s poll of more than 2,170 C-suite and other executives, only 42 percent of public companies and 33 percent of private companies said that they are on schedule to implement the new standards by their effective date. Furthermore, confidence that the implementation will be done on time is low, as those feeling unprepared to comply (29.5 percent) is nearly double those feeling prepared (15.6 percent). 

To find out what caused companies’ to procrastinate their preparation, Bloomberg Tax interviewed Deloitte’s Risk and Financial Advisory managing director Sean Torr and Deloitte Private Enterprises national managing partner Mark Davis. The Deloitte leaders also gave advice on what public and private companies should do with the limited time remaining.

What’s Been Delaying the Implementation

Torr believes that the primary reason companies have delayed is that the implementation process is more complex than most of them had contemplated. And as they begin, they find that activities like selecting the right software solution and integrating it into their existing systems is much more complicated than it sounds.

For private companies specifically, Davis said that many don’t believe the lease accounting changes apply to them, but they need to consider whether “non-lease” contracts could have leases embedded in them.

Partners said that the overall amount of accounting rule changes are also causing the implementation of the lease standards to be delayed. Looking at private companies, “they are just finishing evaluating the revenue recognition standards, and are now starting with figuring out the lease standards,” Davis said.

Three Things Public Companies Should Do

1) Disclosures--Torr said that companies should be working on their disclosures. Companies should be tracing back to the documentation that supports their disclosures and make sure that the disclosures are sufficient.

2)  Making Sure Plan B Is Ready--For public companies, with only four months left to comply, Torr said that it is crucial for them to have a plan B. Meaning, if there isn’t enough time for a long-term, permanent solution, public companies should be looking for an interim/short-term solution. They should start devising a plan B, and as time is running out, they should make sure that the controls are in place for that plan B.

3) Getting Stakeholders Involved--Torr said that companies should be engaging and working with all the stakeholders, including their external auditors, to look back at their implementation roadmaps and to make sure that there are no gaps. It is key to relook at the roadmaps and reassess what else needs to be done.

Three Things Private Companies Should Do

1) Take Advantage of Time--On the other hand, Davis said that private companies have more time to implement the new standards, since they don’t have to comply until the end of 2019. They should take advantage of the extra time and identify their lease population, determine how they might change the accounting, and start to quantify the impacts on their ratios and the numbers that might affect their external stakeholders--such as impacts on loan covenants.

2) Thinking About Software Solutions--Davis also said that private companies should use the extra time to think about software solutions. He said that many private companies are still using excel spreadsheets to track their leases, because they think excel is enough for their current lease arrangements. But he cautioned that they should look at all their contracts and evaluate whether there are leases embedded in them. There are many software solutions that are much more adequate for lease accounting for the long term than Excel.

3) Learning From Public Companies Implementation Experience--Partners said that private companies can look at the experience of public companies’ during their implementation process and learn from their experience. As they observe the experience of public companies, they will be able to identify pitfalls in the process and come up with their own best practices.

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