The new standards on leases visit a world of pain on the CFO, says Ramona Dzinkowski, with the finance function likely to find itself seriously burdened with the consequences
This article was first published in the November/December 2016 international edition of Accounting and Business magazine.
In February, the US-based Financial Accounting Standards Board issued its lease accounting standard ASC 842, Leases. Its equivalent across the pond, IFRS 16, released in January, supersedes IAS 17 and mirrors in substance the US standard. Both standards require a lessee to recognise assets and liabilities arising from all leases on the balance sheet.
In my April column I referred to some of the anticipated impacts of the new rules on company management. As promised, here is the follow-up to that column, with some of the initial consequences.
According to a leases survey released by PwC in June, the most common sources of pain for CFOs from the new requirements are systems upgrades (68%), resource constraints (67.3%) and data collection (62%).
Disclosures were also going to be problematic for just over 61%. The greater concern over systems and data collection, shown in the table below, is because many companies use spreadsheets and accounts payable sy/’stems to account for real estate leases. Even those with more sophisticated software say it is ‘rarely integrated with the company’s accounting systems’.
Others attempting to determine the impact on companies concur. A May 2016 survey of more than 150 finance professionals by Lease Accelerator shows that most companies have no up-to-date inventory of their leases, with almost 65% using spreadsheets or ‘a little of everything’ to track these assets. The survey says it will take ‘weeks’ for 65% of companies with mid-sized leasing portfolios to determine how many equipment leases they have, and ‘months’ for 64% of those with large lease portfolios.
To complicate matters, almost a third of companies with lease values over US$200m say there is no clear owner of the leasing programme. Given the potentially substantial impact on the balance sheet, it’s not unlikely to wind up under the purview of the finance function. Enterprise software provider PowerPlan suggests that all lease agreements will now have to be routed through central accounting for classification tests and accounting treatment, and that capital leases will require much more bookkeeping upon initiation and throughout the life of a lease.
According to most observers, the time to get cracking on leases is now. In the US, the Securities and Exchange Commission (SEC) requires public companies to provide three years of comparable income statement data and two years of comparable balance sheet data, effectively bumping up the reporting process by two years for many. SEC filers with a year-end of 31 December will accordingly have to begin reporting in 2017.
Ramona Dzinkowski is a Canadian economist and editor-in-chief of the Sustainable Accounting Review
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The new pain points for CFOs
|Somewhat difficult||Very difficult|
Adapted from PwC/CBRE’s 2016 lease accounting survey