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Don’t Avoid the Checkup – Embrace the New Lease Standard
On March 1, 2017 / By Mario Hernandez

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Child having a dental examination

How many times have we cancelled our dental checkup, because we are too busy? Tooth pain reminds us to visit the dentist, and he says, “you should have come sooner….”. The FASB issued a new lease standard, Leases, (ASC 842), on February 25, 2016. Are you ready to move forward with implementing the new standard or do you want to delay until the pain is felt?

The key provision of the new FASB lease standard is that lessees will recognize virtually all their leases on their balance sheet by recording a right-to-use asset and a lease liability. This includes operating leases, having previously been recorded off-balance sheet. The existing lease standard has been criticized for failing to meet the needs of users of financial statements, because it doesn’t always provide a faithful presentation of leasing transactions. The new standard proposes to provide for greater transparency in financial reporting. Companies that lease assets including real estate, manufacturing equipment, vehicles, airplanes and similar assets will be impacted.

Public company implementation dates for the new lease standard are fiscal years starting after December 15, 2018. Non-public companies must comply for fiscal years starting after December 15, 2019. Financial executives may look at the implementation dates and be inclined to focus on projects with more immediate due dates and address the new lease standards later. Financial executives can devote some time now to analyze the potential complexity of the implementation and the impact on company resources. The analysis can help a company decide when to move forward with the implementation process and avoid unnecessary financial reporting risks.

The AICPA recommends six steps to an effective implementation of the new lease standard:

  • Assigning an individual or a task force to take the lead on understanding and implementing the new standard;
  • Updating the list of all leases;
  • Deciding on a transition method;
  • Reviewing legal agreements and debt covenants;
  • Considering IT system needs;
  • Communicating with stakeholders.

At first glance, the six-step recommendation seems simple and manageable. Before we get too comfortable with its simplicity, let’s peel back the onion with a few questions. Do you have technical accounting staff available to spend quality time understanding the lease accounting guidance and determining how it impacts your company? Do you know of all your lease contracts and where they are located? Is your company public, and how do you determine whether to transition with the retrospective (requires restatement of comparative periods in your financial statements) or the modified retrospective method (does not require restatement of comparative periods in your financial statements)? Do you have debt covenants or other legal agreements limiting debt levels or requiring approval prior to incurring additional debt? Do you utilize an IT system to manage your lease records or do you use Excel or similar process? Have you discussed the impact of the new leasing reporting standards with executive management, board of directors, debt holders, or other stakeholders?

You may not have answers for all of the questions above, and as you move forward with the implementation of the lease standard, many more questions will arise. The implementation process will not be limited only to the accounting staff. Moving to the new reporting standards will be a company-wide initiative with communication and cooperation among several departments including treasury, legal, facilities management, purchasing, logistics, and fleet management, to name a few. To achieve success with the implementation requires development of a project plan including input from a wide range of functions and requires commitment from executive management.

Companies should look at the implementation as more than a compliance project and use the opportunity to create value for their company. Below are examples of opportunities for value that may be identified during the implementation process:

  • New avenues to improved communication among different departments within the company
  • Improvement of existing internal controls and processes, updates to related documentation, and communication of improvements and changes to affected parties
  • Selection of cost efficient IT solutions to track leases and to meet reporting requirements for the lease standard
  • Consolidation of lease vendors and negotiation of improved pricing
  • Termination or buy out of stale and unneeded operating leases

Companies have the opportunity to identify additional opportunities to achieve value beyond compliance. Challenging the organization to always be vigilant in identifying value-creating opportunities in all our daily tasks is critical for continuous improvement.

 

Trenegy helps companies to implement new accounting guidance and to identify opportunities for companies to create value through process, controls and system improvements.