FASB issued an Accounting Standards Update (ASU) on Feb. 25 intended to improve financial reporting about leasing transactions. The ASU will require organizations that lease assets to recognize assets and liabilities for the rights and obligations created by those leases on their balance sheets.
The consensus of industry professionals suggests companies should use the new standard to rethink not only their lease accounting, but the systems used to track and measure leasing arrangements. Even for financial preparers not interested in rethinking their systems amid other standard implementation efforts, delaying lease accounting changes closer to the 2019 implementation date is a recipe for disaster.
“While the effective date of the new standards was delayed until 2019 for public companies, partially to allow enough time for preparers to adopt the new revenue recognition standard, preparers should not take their eye off of the ball when it comes to preparation,” said Erik Bradbury, Financial Executives International’s Professional Accounting Fellow, in a recent Professional Accounting Update. “Entities should strongly consider using 2016 to prepare for this significant accounting change.”
According to FASB, “The existing accounting models for leases require lessees and lessors to classify their leases as either capital leases or operating leases and to account for those leases differently. Those models have been criticized for failing to meet the needs of users of financial statements because they do not always provide a faithful representation of leasing transactions.”
In response, FASB developed the new standard “to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements.”
The new FASB lease accounting standard will take effect in 2019 for publicly traded companies, and will require comparative financial information that may require the implementation of system and process upgrades by 2017.
Placing existing accounting systems under review for streamlining or overall improvement is the most obvious opportunity for many public companies, according to a recent IBM/CFO whitepaper.
“These new standards have been a long time coming, but organizations that have continued to rely on spreadsheets or homegrown systems for lease accounting may finally see the new standards as a call to action,” the report states.
“It’s clear that CFOs are running short on time to prepare their companies for lease accounting changes, potentially missing an opportunity to implement tools that will not only automate processes required under the new standards, but also reduce the complexity of their companies’ lease accounting and management systems.
In an effort to continue providing actionable insights to financial executives, please click on the link below and participate in the Lease Accounting Changes Survey. The results of this research will be released at the June 16, 2016 Lease Accounting conference to be held in Dallas, Texas. One lucky survey respondent will receive a complimentary admission to the conference.
https://www.surveymonkey.com/r/LeasesDaily