The new FASB and IASB leasing standards go in effect in 2019. And one of the provisions requires a retrospective accounting of lease costs back to 2017. Recently PwC and CBRE Group issued their latest report on companies progress on implementing the new standards. The results are troubling. Of the 600 companies surveyed, 23% haven’t started the conversion process, while 52% are in the assessment phase only. Of the 23 Percent, most (73%) are private companies with fewer than 1000 leases and a 2020 compliance deadline.
There is some speculation that because of the new revenue recognition standard that is coming on line with the new leasing standards, that the new leasing standard may be delayed, although this is unlikely.
Nearly half of the companies that have begun implementation report that they underestimated the level of effort and resources required. Most of those surveyed say the biggest challenges relate to data collection and systems upgrades.
Most companies (66 percent) plan to make some type of system change, with 43% reporting that they will acquire a whole new lease management system. About 25% of the companies worry they will run out of time for system installation and data refresh.
In terms of costs, 43% of companies expect transition costs of less than $250,000, but about half of these companies don’t expect to change their current system.
Most of the survey respondents (72%) expect to depend on existing staff, while 23% are using consultants. The vast majority of respondents (85%) will use at least four dedicated staff to implement the transition.
So what did the survey have to say about expected benefits of the new standards? The respondents reported the following:
• Only one third expect to improve lease reporting
• 29% didn’t expect any improvements
• 10% weren’t sure.
This is a discouraging finding given the enormous effort in time and resources. I suspect that benefits will become more obvious over time.
• 66% of the responding companies have formed a dedicated working group to manage the transition process.
• Few companies have changed their lease/buy evaluation process. Only 4% have revised their criteria for real estate investment, and only 9% for other assets.
• 13% of the respondent companies expect to renegotiate existing debt covenants.
• Fewer than 18% have set up new lease accounting processes and controls.
Conclusion: As expected, the transition to the new leasing standards will require greater effort and resources than initially thought. The fact that system upgrades and data conversion has emerged as the greatest challenge is not surprising. I continue to believe that the unintended consequences of this change have yet to come into focus. Adding 150 trillion dollars in new debt and assets to corporate balance sheets is a mega-change that will certainly affect investor behavior. Time will tell!