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A Call to Action for CPAs -Confronting the Lease Accounting Changes
A Proactive Approach to Providing an End-to-End Solution to Add Value for Your Clients
Contents
Executive Summary
Introduction
Financial Impact and Corporate Readiness
Adding Value for Your Clients
Business Opportunity
Current Status of the Changes
Recommended Next Steps
About the Author
About iLeasePro
Executive Summary
iLease Management LLC has been providing insightful research and recommended approaches into the proposed lease accounting changes for over two years. This presentation dives into not only how the proposed FASB and IASB lease accounting changes will impact organizations but shows how, at the functional level, what questions need to be considered in order to comply with these upcoming standard changes. We outline the functional areas like Corporate, Finance, Treasury, Human Resource and Technology. And given the resource limitations within most organizations, we show how the lease accounting changes will present “Opportunities for Assistance” for Certified Public Accountants (“CPAs”) that are looking for ways to add value to their client relationships.
This presentation explains how CPAs can position themselves to be proactive and provide technology and services that are of critical importance to their clients.
Introduction
Lease accounting, particularly as it relates to lessee accounting, will change significantly under current proposals put forth in a Joint Project between the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”). There are a number of issues addressed in the Joint Project but the major point of contention concerns current standards for operating lease accounting. The fact that a lessee under current generally accepted accounting principles (“GAAP”) can execute a contract to make legally binding payments over a period of time, structure the contract so that it is classified as an operating lease and not be required to reflect that obligation as a liability on the balance sheet has been a source of controversy for both financial regulators and analysts.
The FASB and the IASB began to tackle this issue in 2009 by issuing a Preliminary Views topic paper which was followed by Exposure Draft in August 2010 (‘the 2010 ED”) which proposed major changes to the manner in which leases are accounted for. The 2010 ED sparked numerous comments and a lively debate among financial statement preparers because of the perceived additional complexitythat the proposed changes would entail. The FASB and the IASB (“the Boards”) undertook significant outreach to the financial statement preparer and user communities and in May 2013 issued a revision to the Exposure Draft (“the Revised ED”) which eliminates some of the more complex provisions but retained most of the basic elements of the 2010 ED.
The Boards continue to deliberate and further changes are expected to be made to the Revised ED in an attempt to eliminate additional complexities. However, one thing is clear – the vast majority of lease obligations will have to be recorded on the balance sheets of lessees and the adoption of the final standard will entail significant time and effort.
Financial Impact and Corporate Readiness
The financial impact of the proposed change will be worldwide since this is a joint IASB/FASB proposal and will affect all industries & firms that lease equipment and/or real estate. Implementation of the proposed standard will be a heavy administrative burden on the companies affected since they will have to collect and input a substantial amount of data, perform complex calculations to determine the amount to be capitalized, monitor and continually reassess each active lease.
Financial Impact and Corporate Readiness
90% indicate that they are not prepared for implementation of the new standard
65% expect a significant level of impact on organizations
60% have a major concern regarding readiness of technology systems
Companies all over the world must understand these new rules, develop new processes and either modify existing or acquire new technology to comply. A particularly pertinent finding from the PWC Survey indicates that 60% of the respondents currently have lease information on spreadsheets. It is likely that firms will need to migrate lease information off of spreadsheets and into applications that have been designed to perform the complex calculations that will be required for the changes.
PWC Lease Accounting Survey of over 1,400 Fortune 500 respondents
Financial Impact on Lessees
Financial Impact on Lessees
• Credit Suisse estimated that off-balance sheet liability just for S&P companies is at least $549 Billion (Deloitte Survey).
• Debt to equity ratios, existing debt covenants and various contractual agreements will be significantly impacted.
• For those companies with significant equipment lease portfolios, the pattern of expense recognition will be dramatically accelerated.
• Income tax calculations will become more complicated and financial statement disclosure will greatly expand.
• Costs of implementation will be significant.
Operational Impact on Lessees
• Likely that the accounting for existing leases will have to be revised upon transition.
• No leases will be grandfathered. Existing leases will likely require abstracting of lease details.
• Complexity of lease calculations will increase as more variables will have to be considered.
• Data will require aggregation from various sources not currently considered.
• More estimates and judgments will be required which will entail tighter auditing and tracking.
• There will be an ongoing need to review, reassess and possibly revise initial estimates.
Opportunity
Because of the extended period of deliberation about this issue, surveys have indicated that many in the lessee community have not focused attention on this issue and are not prepared for this change. The scope of the impending changes will be enormous and will involve many constituencies within the organization.
• All active leases existing at the time of adoption will have to be transitioned over to the new accounting method
• Policies and procedures will have to be reevaluated and possibly revised
• Technology systems will have to be reassessed
• Revised Lease strategy may be required
And these are only a few of the issues that must be addressed, but it is clear that significant effort will be required to fully comply.
Adding Value for your Clients
Given the resource limitations at most organizations, all of these issues present a challenge and an opportunity for the Certified Public Accountants (“CPAs”) that are looking for ways to add value to the client relationship.
How can CPAs position themselves to provide services that are of critical importance to their clients?
Perhaps the best way to exhibit possible service opportunities is to look at the following functional areas of potential issues that organizations will have to consider as part of the transition and how you as a CPA can provide assistance in helping your clients cope with the issues that must be addressed.
Corporate Governance
• Roles and Responsibilities• Governance/Controls• Lease Accounting Changes• Internal Audit• Internal Communication• Tax Implications• Global Operations
POTENTIAL CHANGES REQUIRED
Opportunity to Add Value
• Assistance can be provided in the review of Policies and Procedures.
• Provide general consultation in interpreting the more complex provisions of the new accounting standard.
• Work closely with Internal Audit to develop the Internal Audit Plan for review of the accounting change.
• Provide significant assistance in the review of the income and franchise tax implications.
Corporate Governance
Finance / Treasury
• Investor Communication• Contract Administration• Loan Covenants• Ongoing Leasing Strategy• Budget and Forecasting• Performance Metrics• Financial Reporting• Capital Requirements
Opportunity to Add Value
• Provide assistance in collecting and abstracting lease information.
• Assist in the review of revised performance metrics and financial covenant calculations.
• Review and assist with the revised budgeting implications.
• Consult on the required revisions to the financial reporting.
Finance / Treasury
Technology
• System Evaluation and Assessment• Accounting System• Reporting Systems• Lease Management and Accounting• Contact Management• Document Management• Infrastructure
Opportunity to Add Value
• Assist in the evaluation of technology alternatives.
• Provide feedback to management for possible systems alternatives being considered.
• Consider providing an outsourced, cloud-based technology solution.
Technology
Human Resources
• Resource Availability & Skill Level
• Outsourcing• Compensation Plans• Training
Opportunity to Add Value
• Loan staff can be provided to supplement existing resources and assist with data gathering and data input.
• Work as an advisor to the Implementation Task Force to ensure that all required tasks are identified.
Human Resource
Current Status
In the June 2014 meeting, the Boards decided that a sublease where a lessee subleases its space and then becomes a lessor would be accounted for as two separate lease contracts, except in certain instances where the contracts were entered into at or near the same time. But the different approach mentioned in the previous paragraph will impact the specific accounting for the sublease.
The Boards also discussed the balance sheet presentation for the right-of-use asset and the lease liability and basically concluded that they would either be presented on the face of the balance sheet or disclosed in the footnotes to the financial statements. The FASB also determined that the Type A lease liabilities would be presented separately from Type B lease liabilities.
There are several other issues that will be discussed in future meetings, however, the list of open items continues to get much shorter. The standards are expected to be finalized by the end of 2014 or early 2015.
The FASB and the IASB (“the Boards) continue discussing the Joint Project on Lease Accounting. In the latest meeting, converged decisions were reached on a number of issues but the Boards also reached different decisions on certain matters.
A fundamental difference between the two Boards continues to impact many of the deliberations. The FASB has tentatively decided that there will be two types of leases, Type A and Type B, depending on the nature of the underlying asset and the extent of the lease term. The IASB is pursuing a single accounting model for all leases. This difference will impact the expense recognition pattern for certain leases. Both Boards continue to discuss an exemption for short term or small ticket leases.
Recommended Next Steps
Given the delays in completion of the leasing project and an uncertain implementation date, it is easy to become complacent in preparing for the changes that are sure to come. However, although the final effective date may be a few years in the future, the transition will entail significant effort.
CPAs should begin now to engage their clients to discuss how the required tasks are to be accomplished. And work with your client to develop and participate in a transition team to begin answering the questions presented above. Several of these tasks can be started now to mitigate the risks that will increase as we move closer to the finalization of the standards. By bringing together a task force, your client can begin developing an implementation plan that will help in identifying the functional areas within the organization that will be impacted and how these issues will be addressed.
Whitepaper
Download the full whitepaper A Call to Action for CPAs - Confronting the Lease Accounting Changes
Business Opportunity
How can iLeasePro help you add value for your clients?
With the complexity of the change requirements, specifically the data aggregation of multiple leases and ongoing reassessment requirements, we at iLease believe that companies will find the transition challenging and will look for an enhanced technology solution that can provide operating efficiencies. Additionally, given the delays in completion of the leasing project and an uncertain implementation date, many companies will require assistance from their financial advisers in order to compile the information and perform the required calculations.
Business Opportunity
iLease believes that there is a very meaningful partnership that can be developed between iLeasePro and the CPA community. We have been actively following the progress of the proposed lease accounting changes and have been posting guidance on our Blog with a view toward developing an accounting technology component that will allow users to meet the requirements of the proposed standard.
www.iLeasePro.com
However, simply meeting the new accounting requirements is not what companies should be exclusively focused upon. Our accounting component is being developed as part of an overall Lease Analysis, Lease Management and Lease Accounting solution that would allow the users to drive efficiency to the overall lease portfolio through a cost effective technology solution.
Interested in PartnershipGet in Touch with Us
About the Author
Sean T. Egan is Co-Founder and Managing Partner of iLease Management LLC, the developer of iLeasePro. Mr. Egan retired from the accounting and advisory firm of KPMG LLP after having spent 35 years with the firm as a partner providing audit and advisory services to the financial services industry. In 2012, Mr. Egan founded iLease Management LLC along with Co-Founder and Managing Partner, John Meedzan.
iLease Management LLC
Boston, MA
http://www.iLeasePro.com
Sean T Egan, Managing Partner
John J Meedzan, Managing Partner
Making It Easier To Manage the Entire Real Estate and Equipment Lease Lifecycle
About iLeasePro
The Management of iLeasePro is committed to keeping our constituents abreast of the status of the leasing project and operational issues that will result from these changes. Although significant changes to accounting such as these will undoubtedly be time consuming and disruptive, we believe that implementation of these changes should be viewed not just from an accounting perspective but as a way for the overall organization to become more efficient. That is why, in designing iLeasePro, we did not simply look at the project from an accounting perspective. In iLeasePro, we have a Lease Management technology solution that is able to capture all the key data related to the lease portfolio in one central location easily accessible to all those who have need of this information. Critical dates can be flagged so that there is never a reason to miss lease expirations orextensions or an insurance renewal. Lease related documents can be stored electronically for easy access and reference. Contact information regarding key personnel related to the lease can be readily accessed in our Contacts section. And these are only a few features of our Lease Management solution.
Additionally, our Lease Analysis solution is fully integrated with Lease Management. We understand that a technology solution is a critical element of the entire lease cycle, not just after a lease is executed. Lease Analysis allows the user to perform a side by side comparison of various leasing options and provides the user with the critical analytics to make an informed decision about the best alternative for the organization. Once the proposed lease accounting standard has been finalized, we are ready to integrate our Lease Accounting technology solution into iLeasePro to complete a comprehensive and fully integrated Lease Analysis, Management and Accounting solution.
For additional information about iLeasePro and for details as to how you can become a Beta tester of this exciting new product, please go to our website at http://ileasepro.com.
