Revenue
recognition
Accounting
Change
Leases
Getting started
Engaging stakeholders
across your organization
Identifying leases
Judgments and estimates
Enhancing the
outcome of lease
accounting changes
Let’s talk
Leases: the next
big accounting
change
Coming so close together, the dramatic
changes in accounting for revenue
recognition and leases pose an
implementation challenge that will likely be
significant to many companies impacted by
the new standards.
choosing to early adopt.) That leaves less
than one year for much of the up-front
work to be accomplished — at a time when
many companies are, or should be, deeply
involved in addressing changes to revenue
recognition.
One way to manage concurrent accounting
changes is to drive a timely, orderly
transition that can greatly minimize costly
surprises and disruptive missteps. With
that approach, you will likely be better
positioned to take advantage of the dividend
that compliance can bring: improvements in
business processes, IT systems and controls
that can pay off operationally throughout
your organization.
How complex is the up-front work to
operationalize the lease accounting change?
And how broad is its impact? How do you get
started?
Currently, most lease transactions are
off-balance sheet for lessees, leaving the
economics subject to interpretation by
investors and analysts. The new standard
will put most leases on the balance sheet by
recognizing lease assets and liabilities and
will require more disclosure, with the goal of
increasing transparency and comparability.
For US GAAP filers, the new leases standard
goes into effect on 1 January 2019 for
calendar-year public business entities.
The standard requires three years of
comparative financial statements, with
the initial application date of 1 January
2017 for December year-end filers. (That
date would be even sooner for those
Getting started
To get started, or to accelerate the
process and avoid missteps, consider
undertaking a diagnostic review. Establishing
a snapshot of your people, processes
and technology readiness to take on new
accounting rules can create a clear picture
of what is needed to bridge the gap to the
required future state.
Engaging stakeholders
across your organization
All of this effort will require support across
functions, departments and geographies,
with major input from the finance function
supplemented by treasury, corporate real
estate, legal, IT, tax, procurement and, of
course, your business operations.
To make the decisions and settle on the
numbers, you should get your arms around
your full leasing portfolio, a task that
can be much harder than you expect. On
the more daunting side of the spectrum,
decentralized global operations; multiple,
disparate IT systems; and a track record
of struggling to implement major change
programs are all indicators that additional
planning may be required.
Identifying leases
You should determine which of your
arrangements contain a lease; that depends
on whether they involve the use of an
identified asset and convey the right to
control the asset’s usage. Furthermore,
there is a flow of ancillary questions.
Are there non-lease components in the
arrangement? What is the lease term,
considering renewal, termination and
purchase options? What is the lease
classification? Is it a finance lease (interest
and amortization expense) or an operating
lease (generally treated as a straight-line
rent expense)? All of these issues, and
more, call for significant judgments and
estimates.
New changes, elevated risks
The new leases standards
bring with them numerous
risk factors that organizations
must actively manage in order
to achieve compliance and
capture added business value
from mandated change.
Judgments and
estimates
While judgments and estimates have
always been part of lease accounting,
those decisions and numbers may receive
heightened scrutiny because of their
balance sheet impact to the financial
statements and additional disclosures.
Developing a clear set of policies and
standard operating procedures will assist
in making sure that these judgments and
estimates are consistently applied across
your organization.
Also at a disadvantage are companies
that lack consistent processes and tools
to manage lease administration and
accounting, resulting in leases tracked in
spreadsheets (if at all). The change in lease
accounting will present both a challenge
and an opportunity to enhance systems,
control costs and optimize your lease
accounting and administration processes as
you comply with the new standard.
satisfy the new accounting requirements,
including disclosures? Are contract and lease
data available and complete? Do you need
additional data? Are changes necessary
in your processes and controls? How will
you apply technology to gain efficiency and
improve controls?
Our diagnostic will reveal which actions may
be needed, not only to meet the accounting
challenges ahead but to take advantage
of the new capabilities and insights that
compliance will make possible.
Let’s talk.
Anastasia Economos
EY Americas Leases Leader
[email protected]
+1 212 773 3491
Eileen Chan
Executive Director
Financial Accounting Advisory
Services
Ernst & Young LLP
[email protected]
Enhancing the outcome
of lease accounting
changes
+1 212 773 1029
Catherine Von Seggern
Executive Director
Construction & Real Estate —
Advisory Services
Ernst & Young LLP
[email protected]
We can help, particularly in terms of
evaluating the readiness of your currentstate lease administration and lease
accounting capabilities for the new
standards. Does your data structure
+1 212 773 6459
EY | Assurance | Tax | Transactions | Advisory
Inventory of
leases not
complete and
accurate
Poor
end-of-lease
management
Inadequate
tracking of
leased assets
Key risks associated
with lease
administration and
lease accounting
Inaccurate
accounting
treatment
Incorrect tax
treatment
Ineffective
financial
statement
disclosures
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