February 16, 2016 | Rick Zelinsky
New Lease Accounting Rules – Act Now (or spend years catching up)
“The future is uncertain but the end is always near.” ― Jim Morrison
Many of us remember the doom and gloom of Y2K – the momentous event when all software would stop working because it wasn’t prepared for the transition to the 21st century. Companies spent billions assessing the impact and developing replacement systems that would not only address the 4-digit year issue, but also ensure a similar situation would not occur again.
While they were at it, businesses poured considerable resources into reviewing their processes and making other system improvements – taking advantage of the captive audience and significant investments in the name of a complete system meltdown. While that precarious day came-and-went with little fanfare, an important lesson was realized – proper planning pays dividends.
“You cannot escape the responsibility of tomorrow by evading it today.” ― Abraham Lincoln
Fast forward to the current day “Y2K event” – the upcoming lease accounting changes from the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). Designed to increase transparency regarding the liabilities companies incur related to long-term lease obligations, these changes will cause dramatic impacts for many public corporations, most notably the transportation and retail sectors.
Most retailers treat their leases as operating leases, that is, an expense on the income statement. With the new rules, companies will be forced to move leases from a note in their financial statements to the balance sheet, thus recognizing all future lease payments as liabilities. While the lease liabilities will be offset by a “right-of-use” asset, there’s no denying companies are not looking forward to an appearance of being more indebted. EBIDTA will increase for most companies whereas earnings per share will decrease. Speculation is already begun regarding how Wall Street will react. While the same rules will apply to everyone, it does not negate the angst people are feeling and the high likelihood some companies will be considered less appealing to investors.
“Someone’s sitting in the shade today because someone planted a tree a long time ago.” ― Warren Buffett
The changes will take effect January 1st 2019, however, companies have already begun to mobilize. Five key areas are attracting the most focus: information, systems, people & processes, impact and time.
- Information - What information exists today regarding our leases? Do we trust the data we have? Can we transition to the new requirements or do we need to capture additional information from our leases?
- Systems – Can our lease administration system handle the new requirements? Do we need to upgrade? Was our system built with this functionality in mind or is it being retrofitted into a system that was designed for a different purpose?
- People & Processes – If we don’t have the information we need, are we adjusting our processes now to capture the new data today to minimize our impact? Do we have the expertise and resources to ensure our lease accounting practices are robust and compliant?
- Impact – What will this mean to our company? Can we simulate the impact (in detail) and begin to inform executive management in preparation of the transition?
- Time – Do we have the resources to start the process immediately? If we have not assembled the team, when should we start to ensure we have sufficient time to meet our deadlines, factoring in unexpected challenges?
With the focus areas above and their respective questions, companies need help now. Adopting these changes are much more than an additional “side project” for already taxed resources – they will require additional people. Existing systems cannot address all of the needs since many of the financial calculations are still pending finalization. Processes need to be adjusted in stages – first planning for future data requirements, second addressing the implementation and transition of the existing portfolio and finally adopting the new processes required in 2019 and beyond.Assessing the impact will be difficult without automated tools leveraging the lease information already captured.
While the future lease accounting standards provide more certainty than Y2K regarding the end point, proactive planning, adequate resourcing and engaged implementation will make this too an unremarkable event.
Read more about Tango's Lease Administration solution.