Although the “new” lease accounting standards were issued in February 2016, the focus of many companies and their accounting groups since then has understandably been on revenue recognition standards and other operating issues. The real estate and equipment lease accounting standards will become effective for public companies on January 1, 2019 and private companies one year later in 2020, which means that many companies have less than a year to finalize the process of accounting for all leases.
With the amount of preparation required, the time to start is now, but are you ready?
According to a recent survey by the Deloitte Center for Controllership, only 21 percent of respondents said their companies are “extremely” or “very” prepared to comply with the new lease accounting standards. If your company is in the other 79 percent, in the early stages of preparing for changes and compliance accounting for its real estate and equipment leases, where do you start?
Here are seven steps to get you started off on the right foot, right now.
1. Create an executive steering committee, preferably with representatives from Accounting/Finance, Corporate Real Estate (CRE) Management, Legal, and Business Units, to establish, monitor and drive workplans and timelines.
2. Educate those involved in the real estate process on the potential financial and operational impacts of the standards; establish and communicate financial goals for future real estate activities with CRE staff and service providers.
3. Gather, inventory, and abstract information on all current leases – don’t underestimate this step, nearly one third of the Deloitte poll respondents listed this as their biggest implementation challenge:
- Lease terms, including begin/end dates and any renewal options
- Rental rates and contractual increases
- Operating expense and real estate tax escalation clauses
- Original lease costs – landlord allowances, legal and other third-party costs
- Financial details on any space or equipment that has been subleased to others
4. Develop internal processes and information systems to capture lease information and generate the required accounting entries; or outsource it to a qualified provider.
5. Review your lease accounting approach with outside auditors; avoid potential future surprises or disagreements– especially in the middle of the audit.
6. Estimate the potential impact of putting all lease liabilities on the balance sheet; discuss with lenders any negative effect on financial ratios and covenants.
7. Develop or modify your go-forward CRE strategy in light of the new standards; to what extent will your company let the “GAAP tail” wag the “operations dog” and drive real estate decisions?