ATLANTA—Nearly two years ago, Avison Young's Sean Moynihan warned that “many companies will be blindsided” by the new lease accounting standards, which are due to begin taking effect in December 2018, and that preparing for the changes should begin as soon as possible. A new study from AY finds that the majority of companies still lag when it comes to managing the impact of the new rules from the Financial Accounting Standards Board and the International Accounting Standards Board.

“Roughly 77% of companies we surveyed have said that their auditors are looking into the new guidelines or that their accountants are evaluating the impact of the new standards,” says Moynihan, principal at AY in Atlanta. “Companies need to reexamine existing leases before the new standard, a process that could take as long as 12 months, in order to extract embedded operating costs, such as taxes, insurance, common area maintenance and initial direct costs for compliance.”

AY's study also shows that 85% of more than 100 small- and mid-companies' operating leases are not currently on their balance sheets. That means more than US$2.8 trillion of leases going on balance sheets across the globe after the effective date of the new standards. “Lease classification, rental rate structure, options and concessions are additional factors that may significantly increase lease values as well, if companies do not thoroughly review what actions may be taken in advance of the effective date,” Moynihan says.

The blindsiding to which Moynihan alluded in 2015 will mainly befall tenants; the FASB and IASB boards generally will follow the current model for lessors. Among other changes, leases of longer than 12 months will be capitalized, meaning that most real estate leases will move onto the balance sheets of the companies occupying the space. “Even a renewal option in a single lease contract could reduce shareholder equity by millions of dollars,” Moynihan said two years ago.

No exceptions will be made for existing leases; the new FASB/IASB regime will not include a grandfather clause. Accordingly, AY said in '15, every lease in a company's real estate portfolio could negatively impact its financial statements. Public companies, which must include comparative financial data in their financial statements, will effectively be required to transition to the new rules in advance of '18 to stay compliant with SEC regulations.

AY notes that a recent EY study showed that while 90% of companies are aware of the changes to lease accounting, just 7% have begun the process of identifying, reviewing and measuring their current lease portfolios and of establishing internal controls and accounting policies. “All that was needed before the new standard was an Excel spreadsheet,” says Moynihan. Going forward, though, “companies will need a more detailed analysis” when calculating their lease obligations.

Instant Insights /

Companies Still Lag on New FASB Lease Rules

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