Speaking at FEI’s The New Lease Accounting Standard Conference in Dallas, John Bober, Managing Director, Global Technical Controller, General Electric, said as companies begin to prepare their compliance efforts, one of the early challenges is understanding the number and types of leases they have.
“Lease analysis is in early days and, as when companies started complying with the revenue recognition standard, there are a number of interesting they they may not have comprehended,” Bober said. “There are going to be surprises as companies look at their own transactions.”
Citing a report, Paving a path to success: preparing for new lease accounting standards, issued by the Financial Executives Research Foundation (FERF) and EY, Anastasia Economos, a partner in EY’s Financial Accounting Advisory Services practice and EY Americas Lease Accounting Change Leader, said nearly half of responding companies have started lease accounting assessment efforts.
“Most of the steps companies have taken so far have been diagnostic,” Economos said. “Companies are forming working groups to understand their inventory of leases and the data’s that available to assess what they’re doing currently, and to identify what they’ll need to start doing differently. Most companies won’t have the processes, systems or data in one place to comply with the standard.”
One of the factors financial statement preparers will have to understand as they launch a lease accounting compliance effort is understanding the business reasons underlying their companies’ leases. For instance, Bober said, companies may enter into leases for financial or tax reasons, to address short-term needs for assets, or to take advantage of expertise in areas such as real estate management.
Understanding the reasons for these leases can be helpful in collaborating with business-unit managers and identifying the company’s lease inventory.
Most companies will likely have to prioritize their processes and compliance approach according to the types and values of various assets. Bober cited the example of a Fortune 200 company whose initial analysis identified about 700 real estate leases, 15,000 leased vehicles and 44,000 pieces of equipment such as computers, copiers, phone systems and servers.
“As you get into those smaller and mid-value leases, you’re going to have to develop processes and systems to account for changes in that pool of transactions. That’s going be new ground for most organizations,” he said.
Adding to the challenge is identifying factors within a lease inventory including renewal dates or variable payments that will influence lease values.
“Those permutations are going to add complexity to your accounting, as well as your ability to design the processes and tools you’re going to need to complete your calculations,” Economos said. “You’ll need to capture those permutations so you can design an effective process.”
And the specialized nature of varying leased assets means it’s going to be challenging to find a single technology tool capable of collecting and tracking all of the required data effectively.
“As you identify your population, don’t jump into a system because real estate will likely require one type of system, vehicles a different type of system, and equipment will vary according to what you consider relevant for the standard,” Bober said.
As preparers collaborate with business unit leaders, it will also be helpful to explain the changing accounting implications as they enter into new leases.
“It’ll be important to explain these concepts to business people and help them understand what they need to know,” Bober said. “Your accounting team can help your real estate professionals understand what’s important, but won’t be able to embed your accounting people in your real estate team.”
And as if the lease accounting transition weren’t complicated enough on its own, companies are preparing their compliance while simultaneously implementing the converged revenue recognition standard.
“You have to consider if rev rec is draining resources today,” Economos said. “If you haven’t started complying with either standard, good luck.”