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Lease Accounting Struggles Spill into Second Quarter

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(Bloomberg Tax) - Public companies limped across the finish line to revamp their lease accounting earlier this year, but the hard work isn’t over yet.

Companies expect to spend just as much time and effort updating their operating lease liability for second-quarter filings as they did when they adopted the rules in the spring. To calculate the liability they must still rely on spreadsheets and an army of accountants and consultants.

“This is not over for public companies by a long shot. This is still an ongoing challenge,” said Bruce Pounder, who runs the consulting firm GAAP Lab and worked with dozens of public and private companies to apply the new lease accounting standard.

Lease accounting software systems remain incomplete and unreliable. Software vendors have been slow to come up with workable solutions, forcing most public companies to rely on manual work-arounds to adopt the new rules.

The new rules that went into effect in January, ASC 842, require companies to report their long-term rental costs for office space, fleet vehicles, and warehouses on the balance sheet. The Financial Accounting Standards Board adopted the rules to give investors a more detailed and accurate view of a company’s long-term financial obligations.

But accountants have struggled to understand the complex rules, which don’t resemble previous accounting models for leases, Pounder said.

Adding to the complications, businesses have yet to develop routine practices for consistently applying the standard.

“A lot of companies sort of just dragged the project over the finish line and it wasn’t always pretty,” said Sean Ricker, director in MorganFranklin’s accounting and transaction services group.

Ricker continues to work with clients entering the second quarter filing season. The initial adoption took a lot more effort than many clients expected, and the burden didn’t ease much in the second quarter, he said. 

Unprepared

Pleas from private companies to delay their 2020 effective date underscore the problem.

The American Institute of CPAs sent a letter to the standard-setter in May seeking a one-year reprieve for private companies. Amid the laundry list of reasons to support their request, the letter noted errors in the software systems and that public companies—even with their bigger budgets and larger staffs—also are struggling to comply.

But the chairman of the Financial Accounting Standards Board has been listening and the board is poised to give privately-held companies an additional year—a vote could come as soon as July 17.

FASB Chairman Russ Golden said at a Washington event in June that the board would need to provide more time between finalizing future rules and the effective date to give software vendors ample time to adapt. He said problems with the lease accounting roll out proved that point.

“We were disappointed that a lot of software providers were not ready when it came time to implement leases,” Golden said.

Unreliable

Pounder pointed to a key problem: none of the more than 40 software products dedicated to lease accounting can handle all of the required accounting and required disclosures.

Some software products inaccurately break out the current liability—what will be paid out in the next 12 months—from the long-term liability, resulting in a wrong number. That break-out is required by the standard, he said.

For some companies, their software might not be much help adjusting for shifts in lease values every quarter. That routine reassessment reflects any changes in renewal options that could shrink or add to the long-term liability.

Combined, all those changes could significantly alter the financial statement.

It’s particularly burdensome for some companies facing hundreds of lease changes in a single quarter. Monitoring the lease portfolio for changes could take 20 to 40 hours per quarter, Ricker said.

The standard requires more inputs and, more complex calculations. FASB assumed that the technology and tools existed to take raw rental data and spit out the total assets and liability, Ricker said.

“That isn’t the way it worked out,” he said.

Complex changes related to subleases and leases embedded within other types of contracts may require a spreadsheet to track the data and to ensure software calculations are correct, said Jason Krasilovsky, a director at CrossCountry Consulting.

Not all software can handle both real estate and equipment leases. Vendors also haven’t been as quick to provide updates or troubleshoot problems as companies would like, he said.

For larger companies with thousands of leases in their portfolio, those routine leasing changes require more time, consultants, and effort. The extra work is eating into budgets and time that accountants could be spending on other projects, like finance transformation or new accounting rules for loan losses, he said.

Not Alone

“For clients that are going through this, it’s good for them to know that they are not alone,” he said. “This is not just their firm. This is not just their product.”

The CEO of one vendor, Michael Keeler of LeaseAcclerator, acknowledged the accounting shortfalls of some products. But he was confident that vendors will catch up. He noted that software providers continue making updates for revenue recognition rules that took effect more than a year ago.

As the first to adopt any accounting changes, vendors have to trust their interpretation of what FASB intended will stand up to the scrutiny of auditors. And they have a very short time to get it right, he said.

“It’s not to say that we’re perfect.” Keeler said. “I think there is so much novelty and complexity here that it’s a giant challenge for everybody.”

 

This article originally appeared on July 16, 2019 on Bloomberg.

https://news.bloomberglaw.com/financial-accounting/lease-accounting-struggles-spill-into-second-quarter

 

 

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