Nearly half of public company executives see no slowdown ahead in the time and effort to be spent on compliance with the new lease accounting standards issued by the Financial Accounting Standards Board and the International Accounting Standards Board, according to a new Deloitte poll conducted in February 2019. In fact, after they file Q1 2019 earnings, one-quarter (25 percent) expect to spend the same amount of time and effort on lease implementation related activities and nearly as many (23.9 percent) plan to spend more.

“One would expect that the level of effort around lease accounting compliance would drop off considerably for U.S. public companies once 2019 first-quarter earnings are filed, but that’s simply not the case,” said Sean Torr, Deloitte Risk and Financial Advisory Managing Director, Deloitte & Touche LLP. “Whether public companies need to better streamline lease accounting operations, fix temporary manual processes or refine technology solutions, there remains a lot of work ahead for many public companies. Private entities appear to have even more work ahead.”

Private companies appear behind in lease accounting implementation efforts

Nearly one-third (33.2 percent) of private company executives surveyed feel unprepared to comply with their 2020 lease accounting compliance deadline — a rate exceeding any expressed by Deloitte-polled public company execs since the respective standards’ issuances (in February 2019, only 6.9 percent of U.S. public company executives felt unprepared). 

“It’s critical to understand that lease accounting compliance is non-negotiable, and many organizations still have a lot of work to do to achieve compliance — particularly on the private side,” said Mark Davis, Audit & Assurance Partner and National Managing Partner of Deloitte Private Enterprises for Deloitte & Touche LLP. “However, the one thing private companies have to their advantage is that public companies were required to implement the new standard first. Private company leaders can learn a lot from public companies’ efforts to date.”

Some of the lease accounting implementation lessons private company executives can learn from public company leaders are:

• Finding leases is easier said than done. Collecting necessary data on all organizational leases in a centralized, electronic inventory has been rated a top challenge for executives more than once in the past by Deloitte poll respondents."Whether leases are on paper, dispersed globally in various languages or embedded within larger contracts, gathering data needed for lease accounting calculations is a considerable undertaking. Private enterprises can learn from public companies by developing robust lease data plans and data quality procedures not only for initial abstraction, but also ongoing data maintenance,” continued Davis.
• Information technology (IT) solutions can’t do everything for you. “Many public companies expected lease accounting solutions to be ’plug-and-play.’ But, there is a lot more to lease accounting implementation than software alone. Lease software often needs to be configured and tested to address an organization’s needs and to work well with existing systems. Further, the lease accounting software is only as effective as the users working in the system. As such, training and change management are critical components of a system implementation program,” Torr said.
• Don’t underestimate the value of strong processes and controls. “For many public companies, processes and controls were an afterthought. Successful private organizations can achieve efficiencies by designing and implementing lease accounting processes and controls early in the process. In particular, processes and controls should be considered in areas such as impairment, lease modifications, management judgment, reconciliation between actual and contractual cash flows, and the enhanced disclosure requirements of the new lease accounting standards,” continued Torr. 
• Change management is rarely fast or simple. “The organizational changes resulting from the new lease accounting standards are far-reaching and may include areas of the organization such as IT, operations, accounting and finance, tax, treasury, and financial planning and analysis. No matter who is managing the lease accounting implementation at an organization, it’s important to achieve alignment with the various internal and external stakeholders impacted by the changes. Private companies can benefit from strong project management, including a clearly defined roadmap, regular stakeholder engagement, and effective change management and training procedures,” concluded Davis.