Lease accounting laggards face serious risks: Organizations need to consider several factors as they implement new FASB rules - and it's smart to start that work promptly.

Author:Tysiac, Ken
Position:Financial Accounting Standards Board - Cover story
 
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Cathy Clarke, CPA, worries that companies are underestimating the amount of work required to implement FASB's new lease accounting standard.

As chief assurance officer for CliftonLarsonAllen LLP in Minneapolis, Clarke works exclusively with nonpublic companies and not-for-profits, sc she knows the resource constraints smaller organizations face in a lease accounting implementation that is more complicated than it appears.

Maybe they have a limited accounting staff, and they are so busy with another heavy FASB implementation --revenue recognition--that they don't realize that they don't know where some of their lease contracts are. Perhaps they use spreadsheets for their fixed-asset accounting and don't know that they will need to consider modifying their software to perform this accounting. And maybe they haven't considered the effect that new liabilities on their balance sheets will have on their debt covenants with lenders.

"Everybody is looking at this standard and thinking the implementation will be easy. Once they get started, they will realize it is more complicated than it appears on the surface," said Clarke, a member of the AICPA Financial Reporting Executive Committee (FmREC).

Implementation of the new FASB standard is challenging for companies large and small. Like many global companies that are lessees, Bristol-Myers Squibb has real estate, vehicle fleet, and office equipment leases in different languages and formats, often dictated by the many lessors that contract with the company.

Although there is centralized oversight of real estate and certain equipment leases, document management and limited oversight of other leases maintained at the local level have created challenges for the company to understand its full lease portfolio.

But the pharmaceutical company has worked to gather all those leases to implement FASB's new lease accounting standard, which seeks to increase transparency in financial reports. The company has dedicated a multifunctional project team and a third-party contractor to the task. Still, the process has proved arduous.

"Data gathering is extremely difficult," said Bob Owens, CPA, the company's vice president and head of accounting. "We are a company that has some resources, and for companies that don't have the resources to apply to it, it's going to be very difficult, particularly if people have not yet started."

The effective date of 2019 for public companies and 2020 for most other organizations might seem distant (note that not-for-profits with conduit debt and certain employee benefit plans face a 2019 effective date, a year earlier than others in their sector). But the lease accounting implementation is so challenging that it reminds Owens, who is also a member of FinREC, of 15 years ago, when public companies were implementing Sarbanes-Oxley Act (SOX) regulations that...

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