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T-Minus Six Quarters

July 14, 2017

Lease Capitalization / Accounting

Recently I attended a conference presented by Financial Executives International in Philadelphia. There were two accounting topics presented during the two-day conference – one on the new Revenue Recognition Standard (ASC 606) and the second on the new Lease Accounting Standard (ASC 842). My focus was the Lease Accounting topic as it is primarily relevant to our business at Fell Lease Administration and it affects how we conduct our lease administration and lease abstraction services. There were many good sound bites and confirmations of what I already know is true – the lease accounting standard is complex, adoption will likely be very time consuming and the clock is ticking.

Primarily made up of financial and accounting executives from all types of industries, most attendees were very interested in the lease accounting sessions. Could it be that most companies are feeling well prepared for revenue recognition since the standard goes into effect at the end of this year?  Likely.  Could it be that the next project on everyone’s plate is lease accounting?  Also likely, but given some of the known challenges in adopting the standard I highly recommend getting started soon.

There were some good take-aways regarding the new lease accounting standard.  These are the things that make you go hmmmmmm….

Many companies haven’t focused on lease accounting because they have been focused on the more imminent revenue recognition standard
In speaking with other attendees, the consensus is that they are focusing on one new accounting standard at a time.  In a polling of the room during one of the sessions, there were still a majority of attendees that either hadn’t begun to address the lease accounting change or were in the very early stages of a compliance project.  And these are people who are focused on and interested in this topic in their day to day professional lives.  The topic is on the radar but the urgency isn’t there yet.

Compliance with the lease accounting standard will be costly, and not just in terms of dollars
Other than budget, time and resources are expected to be a large component of the overall cost to comply.  It is necessary to have a multi-disciplinary team to address potential new needs for systems, data, documentation and revised policies and procedures.  The team should include accounting, finance, procurement, IT, real estate and others.  Many man hours in many different disciplines will be required to be successful, even though this is an accounting change.

Documentation and data will be one of the most challenging aspects of adopting the new standard
This area is one of the most surprisingly challenging areas of focus.  We are seeing firsthand the challenges in identifying the total lease population and locating the lease documents. Are they in paper or electronic format?  Who leased the copy machine in Taipei and why is it being paid for by an individual and not by the company?  All service agreements should be evaluated as well, looking for embedded lease agreements. The more diverse, global and decentralized the business operations, the more challenging it is to wrangle the documents and data needed to perform the accounting calculations.  Without the documentation and data, all other components of this project come to a standstill, which costs additional time and money.

Have a contingency plan if your preferred service provider is unable to meet your deadline
Given the complexities of complying with the standard, many companies large and small feel that they don’t have existing internal knowledge and resources to do everything needed.  And there are only so many qualified external resources that know enough about the new accounting standard if you need outside help. Thousands of companies need to implement the new lease accounting standard at the same time, which will create demand for knowledgeable resources.

If you wish to work with your top choice for external assistance, make sure that you have them lined up soon.  It will be first come, first served with many of the firms that can offer qualified assistance.  Most of our professional services colleagues agree that with so many companies delaying their adoption of the standard, resources may become scarce as early as the first quarter of 2018.  If that happens, develop an alternate plan – search for other service providers, hire qualified personnel or develop knowledge internally.

We are T minus Six Quarters away (Public Companies)
Six Quarters.  Eighteen or so months.  The countdown begins.  It sounds like a lot of time, but if you back into today’s date there really isn’t much time.

Let’s assume that you need to do a full-scale system implementation to be compliant with the lease accounting standard and you have both real estate and equipment assets to be accounted for.  Your timeline might look like this:

7/1/17 RFI / RFP process begins
10/1/17 Contract award date
11/1/17 Contract negotiations complete
12/1/17 Project kick-off
3/1/18 System configuration complete
9/1/18 Lease abstraction process complete
User testing begins
11/1/18 Parallel operation of old and new systems
1/1/19 Go live with new system
Compliance target date achieved

This timeline assumes that nothing goes wrong – you can identify and locate all your lease documents, you have adequate resources assigned to this project, configuration and integration of a new system goes smoothly and that there are no hiccups.  As you can see, we are pushing right up to the compliance date with no real time to spare.  By the way, if you issue comparative financial statements, your reporting window began on January 1, 2017 – six months ago.

The time to start is now – even if your first step is to plan to take the first step.  Become familiar with ASC 842 and all that compliance will entail.  Look at your internal operations, processes, procedures and systems and evaluate what will need to be done.  Create your project team and lay the necessary ground work.  And don’t hesitate to ask for help – from your accountants, from your software provider(s) and from outside consultants.  We all want you to succeed but we can’t help you get there unless we have the conversation.

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