Are You Ready to Add Operating Leases to the Balance Sheet By January 1, 2019?

Most companies in the US are not fully prepared to implement the new lease accounting standard that comes into effect in six months’ time, according to a new Deloitte study.

“The challenges include new data elements, data housed in various systems, relevant information being spread across multiple lease agreements, a high volume of data fields, and multiple languages, contracting parties and currencies,” reports US publication Accounting Today.

“In many cases, the lease agreements aren’t in electronic format, and there’s often a lack of in-house resources to deal with the new standard,” it adds.

ASC 842 and IFRS 16

There are differences between ASC 842, issued by the US Financial Accounting Standards Board, and IFRS 16, the version of the International Accounting Standards Board. But both standards come into effect on January 1, 2019 and both have the same broad impact: adding operating leases to the balance for the first time ever.

The challenges facing preparers in the US could very well be the same ones that non-US companies are grappling with as they prepare to comply with IFRS 16, particularly those in aviation, property and retail.

One issue in the US, according to the Deloitte study, is deciding between a cloud-based or an on-premise solution. Another consideration is whether to centralize or decentralize systems and processes around leases.

“From our research, it comes down to what the company’s lease portfolio actually looks like, and how complex it is,” Sean Torr, a managing director at Deloitte in the US, told Accounting Today.

“The level of preparedness for most companies is lower than would be expected at this point, so companies are grappling with the timeline component of this implementation,” he adds. “You’ve got a few very long lead time activities that have to be conducted: selecting, installing and testing technology solutions, as well as populating that solution with the data that is required to perform all the calculations, so the window of time is narrowing quickly for companies.”

Interim solution

Torr says some companies might decide to deploy a temporary technology. “We’re actually starting to see more companies exploring an interim solution while in parallel they implement a longer-term solution,” he notes.

He advises CFOs that opt for an interim fix to make sure the data collected and aggregated for the temporary solution can be used as is by the long-term solution. Formats, digital file types, data storage and so on should be compatible with the permanent system.

Torr also counsels constant communications with stakeholders as finance moves to comply with the new standard. “One of the things that we’re seeing is companies realizing how important stakeholder engagement is in this initiative,” he told Accounting Today.

Many in the company in addition to accounting and finance will be leveraging the technology solution, he points out. The data and the resulting balance sheet will have an impact on planning, budgeting and investor sentiment.

“The clear message we’re hearing from the market and from conferences is that stakeholder engagement, communication and training are really important,” says Torr.