New lease accounting standards will come into effect from 1 January 2019 for public companies, but only 15 per cent of companies have completed their implementations to date, according to a KPMG survey. Private companies will have to comply with the rules by 1 January 2020. The Financial Accounting Standards Board (FASB) lease accounting standards are said to be “some of the most significant changes to lease accounting to date” and will require companies that are lessees to recognise the assets and liabilities for the rights and obligations created by those leases on their balance sheets, increasing transparency and comparability among organisations that lease buildings, equipment, and other assets.
The survey by KPMG found that:
- 15 per cent of companies have already completed their implementations;
- 45 per cent are in the process of implementing;
- most companies rely on external accounting advice from the Big 4 accounting firms; and
- around half of companies said that technology will be critical to streamlining implementation efforts and costs associated.
Implications for tax, reporting, IT
KPMG’s Marybeth Shamrock commented that, from experience she has seen that “companies still have a lot of work to do in order to achieve compliance with the lease accounting standards”. According to the survey, companies expect significant implementation costs due to the new lease accounting rules. These costs are expected to range from $250,000 to more than $500,000 – and more than a quarter of respondents expect costs to exceed half-a-million dollars. Shamrock added: “The new requirements call for a substantial change in the way companies account for all their leases – from office space to heavy equipment, trucks and airplanes – and will have implications throughout the organisation, including tax, reporting, and technology.”
Unexpected challenges and budget overspend
A KPMG study published in October last year found that companies are struggling to implement software and processes in preparation for the FASB lease accounting rules and encountering problems such as:
- Nearly 60 per cent indicated that they have been surprised by some of the challenges they are running up against, including identifying embedded leases and selecting and implementing an adequate leasing system.
- Forty per cent of companies also said their leasing implementation costs are exceeding the amount budgeted a year ago, caused largely by a realisation that they will need new lease accounting software and having to spend more time than expected to identify, abstract, and enter leases into a system.
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