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Lease accounting changes expected to cost millions

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Lease accounting changes expected to cost millions

The use of outside resources has surged among companies, with budgets ballooning to meet the impending deadline

Tuesday, December 4, 2018
By Michael Cohn for

Companies are expanding their budgets to accommodate the new lease accounting standard, turning to interim solutions, temporary employees and outside consultants, with many of them expecting to spend millions of dollars on the effort, according to a new survey by Ernst & Young.

Almost half the companies polled by EY anticipate a cost between $1 million and $5 million to implement the changes for the new leases standard. Both multinational and domestic companies cited a number of factors as the barriers to success in implementing the new standard, including systems complexity, gathering and reconciling fragmented data, data quality and antiquated legacy systems.

More than 80 percent of the companies polled indicated they are working on designing a long-term automated solution for lease accounting. More than half the companies (51 percent) using a long-term automated solution plan to use artificial intelligence. Of those companies who have already selected a long-term system, 86 percent said they are also planning to implement interim solutions to meet the impending deadline.

The use of outside resources has surged among companies, with budgets ballooning to meet the impending deadline. Forty-five percent of the companies surveyed indicated they are turning to temporary contingent workers to support the lease accounting change this year, compared with 17 percent in 2017. More than half of them (56 percent) are bringing in consultants, a 16 percent increase over 2017. Nearly half the companies polled (47 percent) said they are anticipating a cost between $1 million and $5 million to implement the changes just for leases. Last year, only 28 percent indicated the same.

The Financial Accounting Standards Board and the International Accounting Standards Board worked for nearly a decade to converge their standards for lease accounting. Although significant differences remain, the standards under both U.S. GAAP and International Financial Reporting Standards will put operating leases on the balance sheet of many companies for the first time. For public companies in the U.S., the standard takes effect for fiscal years, and interim periods within those fiscal years, starting after Dec. 15, 2018, so for a calendar year company, it would be effective Jan. 1, 2019. For private companies, the standard is effective for fiscal years beginning after Dec. 15, 2019 and for interim periods within fiscal years beginning after Dec. 15, 2020.

Despite the challenges, 85 percent of the 304 finance and IT leaders from U.S.-based public companies who were polled said they’re on track to meet the required deadline of the new leases standard. The remainder admitted they’re experiencing challenges and may not have a fully functioning system in place by the deadline.

“Compliance with the new leases standard has become a larger, more complicated endeavor than many companies originally anticipated,” said EY Americas leases leader Anastasia Economos in a statement. “From choosing a system and gathering all relevant data from across the organization to deciphering contracts and identifying embedded leases, piecing together the data and IT puzzle, especially for complex global organizations, is core to the challenges many companies face, but also necessary for a successful implementation.”

Data collection is proving to be difficult in many organizations, particularly for multinational companies. Eighty-three percent said inventorying and collecting data for leases internationally is challenging, while 78 percent said the same about U.S. data. More than three-quarters of the survey respondents (78 percent) said that finding the resources and skills within their current IT team has been difficult.

The recent requirement for implementing the revenue recognition standard ahead of the leases standard is proving to be tough for many companies. More than half the companies (51 percent) describe their experience of implementing the revenue recognition changes as very challenging, while 72 percent of the respondents anticipate significant systems and process changes after the initial implementation.

“A number of companies have been able to apply lessons learned from implementing revenue recognition changes to the new leases standard,” said EY Americas accounting change leader John McGaw in a statement. “And with leases proving to be an even more complicated process, the effective date isn’t the end of the road. Knowing that most companies are still dealing with the necessary revenue recognition changes two quarters past the 2018 deadline, it’s easy to anticipate that the same will be true for leases.”
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