Operationalizing the new lease standard
The Financial Accounting Standards Board (FASB) initiated a joint project with the International Accounting Standards Board (IASB) in 2006 for the purpose of revising lease accounting standards. After their decade-long efforts, both Boards finalized their respective lease accounting standards in early 2016. The new standards fundamentally change the rules that govern accounting for substantially all leases, including equipment and real estate leases. We expect the standard will have far-reaching implications in areas such as accounting, finance and reporting, real estate, tax, and technology among others.
It's been more than a year since the FASB issued its new standard on accounting for leases, and the transition to the new standard has been a hot topic. Have you got questions? Listen to a replay of our May 2017 Dbriefs webcast FAQs about the new FASB leases standard: You're not alone. You’ll hear Deloitte perspectives based on discussions held with the FASB, other accounting firms, and the preparer community.
How ready are you for FASB’s new lease accounting standards?
Current US Generally Accepted Accounting Principles (GAAP) as prescribed by Accounting Standards Codification (ASC 840) focuses on whether the lease transfers substantially all of the risks and rewards of ownership. The new guidance, codified as ASC Topic 842, Leases, introduces a right-of-use model, which shifts from the risks and rewards approach to a control-based approach.
Initial steps to plan for the road ahead may include:
- Understand the accounting requirements
- Understand the lease population (e.g., by type, system, and location)
- Assess capabilities of existing technology
- Perform a lease data gap analysis
- Develop an implementation roadmap that includes all impacted areas
What is the effective date?
The FASB’s Accounting Standards Update, ASU 2016-02, Leases, was issued on February 25, 2016. The new guidance is effective as follows:
- For public business entities, the standard is effective for annual periods beginning after December 15, 2018 (i.e., calendar periods beginning after January 1, 2019), and interim therein.
- For all other entities, the standard is effective for annual periods beginning after December 15, 2019 (i.e., calendar periods beginning after January 1, 2020), and interim periods after December 15, 2020.
- Early adoption would be permitted for all entities.
The IASB’s standard, IFRS 16, is effective for annual periods beginning on or after January 1, 2019. Early adoption is permitted, though an entity is not allowed to adopt the leases standard any earlier than it adopts IFRS 15, Revenue from Contracts with Customers.
Read our Heads Up publication for a comprehensive summary.
What are some of the expected impacts?
The Leasing model will likely require operational and system changes potentially impacting many areas in the organization, including accounting, finance, financial reporting, taxes, and technology among others.
Operational considerations include:
- Challenges in data collection and aggregation across multiple locations and technology platforms
- Technology capabilities to store lease data and perform calculations, including calculations during the look-back period (comparative prior periods)
- Review of lease tax classification and other factors; any changes in classification require IRS consent
- Enhanced disclosure requirements
- Financial ratios may change with potential impacts to debt covenants or other guarantees
- Impact of limited resources and ongoing business needs on timeline for adoption
- Transforming from paper documents to sustainable technology solutions
Lessee accounting illustration: A simple lease arrangement under ASC 842
A lessee enters into a three-year lease and agrees to make the following annual payments at the end of each year: $10,000 in year 1, $15,000 in year 2, and $20,000 in year 3. The initial measurement of the right-of-use asset and liability to make lease payments is $38,000 at a discount rate of 8 percent.
The table below highlights the differences in accounting for the lease depending on whether it is classified by the lessee as a finance lease or an operating lease.
Consider how technology can help you modernize management of your lease portfolio and accounting:
Document Abstraction software: Recommended for companies that want to accelerate the process of extracting data from documents. Deloitte’s software uses machine learning and automation for fast document abstraction and is used during Deloitte’s abstraction services. Contact us to learn more.
LeaseController™: Designed for companies that want a tool to facilitate implementation of the new lease accounting standard. Deloitte’s LeaseController is web-based and supports both accounting and reporting requirements under current and future standards. LeaseController is bundled with Deloitte’s lease accounting services. Contact us to learn more.
LeaseMARC™: Designed for companies that want an end-to-end lease accounting and reporting solution–from planning, abstraction, and assessment to insights and audit-ready reporting. Deloitte’s all-in-one solution provides the right people, best-in-class processes, and cloud-based technology that’s outcome-based with a predictable pricing model to help organizations achieve higher value and cost efficiency. Contact us to learn more.
Check out the following for the latest news on the new lease accounting standards:
- Does your business have a lease? The FASB just made a big change (Forbes, 5/11/17)
- Frequently asked questions about the FASB’s new leases standard (Deloitte, 4/25/17)
- New lease accounting standards: Are companies prepared to comply? (Deloitte poll results, 6/6/16)
- An executive summary of the FASB's new lease accounting standard (Deloitte, 5/16/16)
- IASB website
- FASB website
- Center for Controllership™ Services