Lessons Learned from Early FASB Adopters

An interesting finding came out of a recent survey by one of the Big Four accounting firms. Only 8% of 13,000 questioned said they have a good understanding of the recently announced changes to the Lease Accounting Standard. With 92% somewhere between “general understanding” and “haven’t started”, the impending IASB/FASB deadline is going to seem like an insurmountable task.

Having worked over the last 10 years on a variety of projects for the “8%ers”, there are a number of lessons learned that can be offered to those just starting out:

  1. You may not have as much time as you think. For public, calendar year reporting companies, the first financial reports under the new standard will be due for Q1 2019 (3/31/2019) and will require comparative reporting from Q1 2017. So in the best case scenario, companies would have their process, systems and data in place to perform double accounting by January 1, 2017. If that is not achievable, companies can retroactively build the 2017 & 2018 comparative reports, but that will require even more resources and could be subject to miscalculation and over or under reporting.
  2. Do not underestimate the effort or cost to get there. For companies with more than a few hundred leases this undertaking will require significant time and resources from a cross functional group within the organization. However, since most of the critical staff needed for this effort also have day jobs, many companies wrestle with the balance of allocating the right mix of internal and external resources. There are also two distinct stages of this process which include; the required preparation work to assemble all of the historical and active lease information, validate the process and information, and the ongoing change management and reporting responsibilities that it will follow.
  3. Changing from Operational to Auditable Information Management. Most current operational processes and lease management systems are not designed for the auditability or management of the information required for the new reporting requirements. Even if some existing information from legacy systems can be utilized, there remains a significant amount of information to collect and reformat. Portfolios with decentralized management will require the most effort. For companies that must report in both IFRS and GAAP formats, there will be extra work in assessing the internal systems and processes.
  4. Include an organizational change management plan. The most significant and often under estimated change as a result of the new Standard is in the organizational review, approval and execution of leases. The timing on major new leases and seemingly simple lease renewals could skew financial reports every quarter. In the current FAS 13 world, there is little impact to managing hundreds of lease renewals in a quarter. In the new world, the timing of these decisions can create spikes in expense, or increases in assets and liabilities that will need to be managed.
  5. Get started sooner rather than later. Many of the 92% are now forming work groups and project teams to assess the impact, evaluate technology and identify stakeholders in the new process. Much of this analysis, particularly if it involves procurement and deployment of new systems, can take months in even the most efficient organizations. Rather than lose that time against a ticking clock, companies can begin today assembling, validating and supplementing the necessary lease documentation and data that will be needed. With the Standard published, the information and calculations have been defined. The work can begin immediately. There is a finite group of knowledgeable professionals that will be in high demand for the next few years. Be wary of newly minted lease accounting experts.

Lou Battagliese