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Operationalizing the new lease standard
The Financial Accounting Standards Board’s (FASB’s) new standard on accounting for leases is set to take effect January 1, 2019, for US public companies with calendar year ends, affecting entities across all industries that enter into lease arrangements or sign contracts containing leases to support their business operations. Accounting Standards Codification (ASC) Topic 842, Leases, changes 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.
Transition to the new standard
As companies enter the final stretch for implementation, the transition to the new standard continues to be a hot topic. Do you have questions? Listen to a replay of our Special Edition
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How ready are you for FASB’s new lease accounting standards?
The current US Generally Accepted Accounting Principles (GAAP) for lease accounting, as prescribed by ASC 840, focuses on whether the lease transfers substantially all the risks and rewards of ownership. The new guidance 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 new accounting requirements
- Identify and understand the complete lease population (e.g., by type, system, and location)
- Assess the capabilities of existing technology
- Perform a lease data gap analysis
- Develop an implementation road map that includes considerations for all impacted areas
What is the effective date?
ASC 842 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 January 1, 2019), and interim periods therein.
- For all other entities, the standard is effective for annual periods beginning after December 15, 2019 (i.e., calendar periods beginning January 1, 2020), and interim periods after December 15, 2020.
The International Accounting Standards Board’s (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.
Refer to our Heads Up publication for a more comprehensive summary of the new guidance.
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
- Development of new procedures and controls regarding the rollout, training, and onboarding of resources
- 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 guarantees
- Impact of limited resources and ongoing business needs on timeline for adoption
- Transforming from paper documents to sustainable technology solutions
Document Abstraction software: Deloitte Risk and Financial Advisory
LeaseController™: Designed for companies that want a tool to facilitate implementation of the new lease accounting standard. Deloitte’s LeaseController is web-based and assists with both accounting and reporting requirements for lessee positions under current and future standards. LeaseController is bundled with Deloitte’s lease accounting services. Contact us to learn more.
LeaseMARC™: Leveraging Deloitte’s distinct Managed Risk Services (MARC) operating platform and delivery model, LeaseMARC provides a broad set of lease accounting and reporting services by bringing experienced professionals, leading class processes, and our proprietary technology in a single offering. Contact us to learn more.
Bloomberg BNA interview with Deloitte’s Brandon Coleman regarding lease accounting
Check out the following for the latest news on the new lease accounting standards:
- Incremental Borrowing Rate (IBR)
- Lease Disclosure
- Embedded Leases
- IT Vendor Selection
- 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