Along with regulatory action from tax reform and tougher Know Your Customer (KYC) rules adding the pressure of complex red tape, public companies need to add one more compliance concern to their list: changes to accounting standards by the Financial Accounting Standards Board (FASB).
The new standards address a range of reporting requirements, including how companies record credit losses and revenue recognition, and analysts warn that disruption is ahead.
“Private companies are starting to realize it’s not business as usual,” said Deloitte Private Enterprises Managing Partner Mark Davis in an interview with Accounting Today last September.
Previous research from PwC found that nearly half of 3,000 corporate finance executives were still in the assessment phase of adopting the new accounting standards, which will go into full effect for public companies in 2021.
But while the changes may disrupt businesses and put an extra burden on accounting and financial professionals to ensure their companies remain compliant, the new standards aim to streamline businesses’ ability to gain a holistic view of their finances. Some of the biggest changes are in the ways organizations record finances related to their leases.
According to Whitney Schiffer, CPA, in an article published last year, the new rules mean “businesses will be able to centralize the inventory and management of all lease arrangements and gain a clearer view of whether those assets are improving business performance.”
Michael Keeler, CEO of lease accounting software company LeaseAccelerator, says these accounting standard changes will indeed lead to disruption and test companies’ ability to manage data about their lease agreements.
“At first, the new lease accounting standards can seem overwhelming to most companies,” he told PYMNTS in a recent interview. “In many ways, they are.”
But, Keeler added, they will also enable companies to gain a clearer view of their lease portfolios, and even help firms obtain better deals on products like equipment financing.
The biggest change in the way companies record lease agreements is the requirement to report operating leases on the balance sheet, whereas traditionally, companies were only required to disclose that information in the footnotes.
Keeler explained that the changing requirements mean companies must be able to aggregate all of their lease data and implement processes to better manage it – a feat that can be challenging for companies that have hundreds of lease agreements across multiple units, often in multiple jurisdictions.
“This will require investing in automation for most companies that have over 100 leases, as tracking that level of detail on spreadsheets will not be possible,” he said, adding that lessors may see their customers requesting more information as businesses adhere to the new requirements.
Keeler acknowledged that these requirements “may seem burdensome at first.” But, he added, they “can create ROI if done properly.”
One of the biggest opportunities for businesses lies in the ability to gain a more holistic view of their lease agreements, which can give them the upper hand when negotiating on new leases.
Further, Keeler explained, there are indirect effects of the new lease accounting standards, and compliance could enable businesses to obtain better terms on products like equipment financing. For instance, enhancing the management of lease data means a reduced risk of finding weakness during an audit, a threat that Keeler said could cause a market cap decline and increase risk for creditors and lessors.
“Having lease data at their fingertips … will allow procurement organizations to have visibility into what is currently leased, the lease terms, and the rates,” he added. “All of this information can then be used to negotiate better terms going forward.”
Lease Versus Buy
Despite its benefits, the burden of new lease accounting standards raises the question of the advantage of leasing in the first place. Keeler noted that the general rule of thumb is: “If the item is appreciating in value over time, buy it. If it’s depreciating, lease it.”
Leasing items like equipment is generally a more cost-effective option for organizations considering the rate of depreciation, but businesses must be sure that they are getting a fair deal on their lease contracts and terms.
“Most companies do not have resources to properly competitively source their leases,” said Keeler, adding that obtaining the best rates and terms is the biggest challenges for lessees.
The competitive bidding process can be a lengthy, time-consuming process, leading most organizations to simply work with the most convenient option – such as obtaining a lease from their main bank – rather than strategically source for a better deal. With accounting standards now pushing for organizations to have a bird’s-eye view of their existing lease agreements, there may be opportunity for businesses to take an even deeper dive into lease management, something that Keeler noted might garner a bit of hesitancy.
“The challenges the companies face is to drastically transform their lease management processes – something that has never been attempted by most,” he said. “However, once the dust settles and these companies have put the processes, policies and controls in place to better manage their lease portfolios and stay in compliance with the new standards, they will see a whole new world of opportunity for cost savings.”