Countdown to January 2019: Lease Accounting Standards
- May 02, 2018
As we approach the halfway mark of 2018, one area about which we are increasingly hearing from CRE executives is the new lease accounting standard that will go into effect for public companies in less than a year: on Jan. 1, 2019. Just 21 percent of respondents across industries polled by the Deloitte Center for ControllershipTM on Jan. 31, 2018, have reported that their organizations are prepared for the new rules.
For the most part, we’re hearing from many executives that their implementation playbooks are no longer workable and that they need to move on to Plan B. The trouble, however, is that many don’t have a Plan B and need help pinpointing the specific activities on which they should double down between now and year end to sufficiently adopt the new standards.
First, CRE executives should understand the options available to them at this stage of the game. In November 2017, the Financial Accounting Standards Board (FASB) proposed a practical expedient for companies to help ease the burden of the rule’s comparative reporting requirement. It is now optional, not compulsory, for companies to restate comparative reporting periods.
While some executives are aware of this important change, many are not. In the January 2018 Deloitte poll, some respondents expressed concern that the expedient will increase the time and effort they spend on lease accounting. On the contrary, forgoing comparative reporting can save companies significant time and money, especially for lease modifications that occur during the comparative period. We therefore expect that most companies will likely elect to skip comparative reporting because it may make compliance considerably easier.
Leveraging the practical expedient doesn’t solve for every implementation challenge, however. Companies racing to prepare should also understand that they should address any operational challenges promptly. These could be issues with systems solutions that may necessitate workarounds, a lack of controls for identifying lease populations, or even an absence of processes for extracting data from contracts necessary to report under the new standards.
Many companies are behind in these areas. As of January, 33 percent of poll respondents indicated that collecting the necessary data on all organizational leases in a centralized, electronic inventory is their biggest challenge. In our experience, obtaining the appropriate data fields necessary for purposes of complying with the new accounting rules is a significant effort. For companies that are just now trying to tackle data challenges, it will be important to think through the types of bridge solutions they can implement for the short term to meet minimum compliance requirements, and leave the long-term solutions to next year.
Finally, executives should remember this: FASB most recently addressed fresh concerns from companies on lease accounting in its March 2018 board meeting and could issue more updates to help organizations meet the implementation deadline in coming months. FASB is also keen to hear from companies about emerging implementation challenges that could derail on-time adoption, so reach out to the organization if you have concerns.
Steven Bandolik is a managing director with Deloitte Services LP and a senior leader in Deloitte’s real estate and construction practice. Bandolik provides advisory services in capital markets (debt and equity), corporate finance, mergers and acquisitions, investments, strategy, restructuring and reorganization, and asset recovery. Bandolik brings more than 30 years of effective, hands-on real estate investment, finance, development, and asset/property management experience, both as a leader and as a strategic advisor.
Sachin Sethi is a Deloitte Risk and Financial Advisory partner for Deloitte & Touche LLP with nearly 25 years of experience serving some of Deloitte’s largest financial services clients. He advises clients on the application of financial accounting standards related to complex financial instruments such as derivatives, securitizations, and lease transactions, among others, under both US GAAP and IFRS. Most recently, he has been leading projects assisting clients to address the challenges of implementing the new lease accounting standards.
You’ll find more on this topic in the May 2018 issue of CPE.