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Just seven percent ready for new lease accounting standards

Only seven percent of executives in US companies believe their organisations are “extremely” or “very” prepared to comply with new lease accounting standards proposed by the International Accounting Standards Board (IASB), according to Deloitte.

Deloitte adds that just 35 percent of respondents say they are “extremely” or “very” confident in the integrity of their company’s lease data that is needed to comply with the new standards, which could be finalised in June.

The standards will effectively eliminate all operating leases and require them to be capitalised on the company’s balance sheet, replacing rent payment expense reporting with interest and amortisation expense reporting. It will mean that lessees and possibly lessors in the US and the UK would have to “fundamentally change how they account for real estate and equipment leasing transactions”, providing more extensive financial statement disclosures than before.

Deloitte also warns that companies with large lease portfolios should anticipate a need for significant upgrades or acquisitions of new systems necessary to comply with the new standards. One-quarter of respondents to Deloitte’s survey said that their companies are likely to have to make a major upgrade to their information technology systems, while 20 percent will need to buy a new system. 

More than 40 percent of respondents believe the new standards will make it more difficult to obtain financing. In addition, 68 percent say they will have “a material impact” on their debt-to-equity ratio and 40 percent thought the new lease standard would lead to shorter-term leases.

Among companies with 1,000 or more leases, the need for IT investment was even greater as 39 percent of these respondents expect the new standards “will lead to a major technology system upgrade”, while 27 percent expect to acquire a new system.

In addition, just 21 percent of respondents are “extremely” or “very” confident in the capability of their companies’ information technology provider to comply. Half of those businesses say they expect implementation of the new standard to take one year or longer.

“For the real estate industry, whether in the US or UK, the impact of the proposed new lease accounting changes will affect both the balance sheet and tenant strategy and execution,” says Deloitte UK real estate partner Mark Beddy.

“The proposed new leasing standards will require a re-examination of capital expenditures on new leases, enhanced lease administration and forecasting systems, and careful consideration of the balance sheet and income statement impacts on existing loan covenants.”

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