Don’t Underestimate the New Leases Standard: How To Be Ready

For many years, organizations have been anticipating the implementation dates of two significant and far-reaching accounting standards: revenue recognition and leases. Many have understandably prioritized the implementation of the new revenue recognition standard, with all companies needing to comply no later than January 1, 2019. However, the deadline for complying with the new leases standard is coming into sight just a short year later and will take significant time to prepare for as well.
 
Accounting Standards Update (ASU) No. 2016-02, Leases, which the FASB issued back in 2016, will impact organizations across all industries that have leases and issue any type of financial statement under GAAP. But there may be more to do then you anticipated in getting ready for adoption of this new standard; if you haven’t yet assessed how it impacts your financial statements and debt covenants and haven’t yet created an implementation plan, time is of the essence. 

Key Aspects of the Standard

• Lessees will recognize all leases with a term greater than 12 months on the balance sheet
• All leases will be either finance or operating leases
• Total lease expense and reported cash flows will typically not be substantially changed
• Additional qualitative and quantitative disclosures are required related to understanding cash flows related to the leases and to provide additional information about the amounts on the financial statements
• Lessee accounting will require significant judgments, which may require changes in processes, IT systems and internal controls
• Lessor accounting will be substantially unchanged 

Significant Implications

• Will add additional lease-related assets and liabilities to the financial statements
• May affect compliance with loan covenants, as financial ratios may change
• Will require organizations to make decisions on transition approach and adoption of practical expedients 

How to Prepare/What to Include in Your Implementation Plan

First, become familiar with the standard, including the available implementation guidance, and seek out related training.

Next, develop an overall adoption plan:

• Assign an individual to oversee the process
• Establish a timeline and milestones, including taking inventory of your current leases, gathering key data about each lease, and developing an efficient way to track all pertinent data
• Determine materiality
  • Make key policy decisions regarding practical expedients available in the standard that can be elected by certain entities or in certain arrangements, including selection of transition method
  • Consider the impact (including necessary changes to lease/debt contracts, technical changes within accounting or supporting systems, monthly and annual financial close process, internal financial reporting and audited financial statements)
  • Update your policy and procedure documents related to tracking leases in light of the new standard

Available Transition Approaches

The original standard required a modified retrospective transition approach, in which you would initially apply the new leases standard (subject to specific transition requirements and optional practical expedients) at the beginning of the earliest period presented in the financial statements (which is January 1, 2019, for calendar year-end non-public business entities that adopt the new leases standard on January 1, 2020, if comparative financial statements are presented).
 
Based on feedback from financial statement preparers that the required approach was too costly and complex, on July 30, 2018, the FASB issued a new ASU that allows for an optional alternative. This approach allows initial application of the new leases standard at the adoption date (such as January 1, 2020, for calendar year-end non-public business entities) and recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.
 
Note that prospective transition is not allowed. Collaborate with your accounting service team to help you determine which transition method is preferable for your organization. Your team can also assist you with the implementation process. Don’t wait to begin planning. The sooner your implementation plan is in place, the better position your organization will be in to comply.
  
Contact Jami Blake, Brian Fiedler, Lisa Metzinger or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.