Are Companies Ready for Lease Accounting Changes?

We are mere weeks away from implementation of the Financial Accounting Standards Board’s (FASB) Accounting Standards Update (ASU) addressing lease accounting. The ASU standards are set to go into effect for all public companies effective January 1 (2019). Implementation for private companies comes in 2020.

So, are public companies ready for the changes? According to Bloomberg BNA, no. They cite a recent PwC poll that shows only 4% of America’s public companies have already completed implementation of the new standards. Approximately 80% are still working on implementation. Bloomberg does not mention the remaining 16%.

Implementation for most public companies likely requires an overhaul of accounting software along with a rigorous testing process to make sure everything is in order. With more than six months to work on it, it’s surprising that so many companies are not yet ready to go. It will be interesting to see how privately held companies fare with an extra year to get ready.

Basics of Lease Accounting

Lease accounting is a method by which companies and their CPAs account for the use of certain assets that may be leased to third parties. A qualifying lease arrangement would be one under which the lesser gives control and use of an asset to a lessee for a stated period of time in exchange for some sort of payment.

Let’s say Company A owns vacant property it intends to lease out to Company B. The lease has to be accounted for on both ends. Company A must account for the value of the asset and the payments received on the lease. Company B has to account for the value of the asset and how much it pays to lease it.

That is basic lease accounting in a nutshell. Obviously, the actual details of lease accounting run far deeper. Suffice it to say that it has to be done properly in order to clearly spell out obligations and protect the rights of both parties. The ASU is intended to strengthen lease accounting in both regards.

Core Principles of the ASU

Gurian CPA Firm, a Dallas accounting firm that serves both businesses and individuals, says that the core principles of the new standard are fairly straightforward. The standard accomplishes the following six things:

• It requires lessees to include information on balance sheets recognizing both leased assets and the rights and obligations created by their associated leases.
• It requires lessees further recognize leased assets and liabilities on leases extending beyond 12 months.
• It maintains current GAAP standards for classification of both finance and operating leases.
• It requires both kinds of leases be included on balance sheets, not just capital leases as required by GAAP.
• It requires full disclosure that allows investors and other interested parties to make fully informed decisions about leased assets.
• It implements a number of additional improvements to lease accounting, bringing it more in line with the current environment.

Companies are strongly encouraged to get help if they are struggling with implementation of the ASU. It is expected that larger public companies have staff CPAs already working on implementation. If said companies need to bring in extra help between now and January 1, doing so is better than not being ready.

As for privately held companies, now is a good time to begin looking for a CPA capable of implementing the new standard. They still have a year to prepare, but delaying adoption puts them in jeopardy of the same scenario public companies are now facing: wait too long and you run out of time.