The new lease accounting standards (ASC 842 and IFRS 16) come into force at the start of next year, fundamentally changing how companies account for leases. It can move thousands of leases onto a company’s books and requires CFOs to apply accounting judgment across thousands of leases.
“Many investors, CEOs and business managers are on course to hit the unforeseen impacts of new lease accounting rules. The financial effects of the new rules are largely unknown as most companies have yet to implement systems that can deliver control and transparency over lease accounting,” global marketing director Ross Chapman said.
Aptitude Software’s analysis shows that the total value of lease liabilities is only a small part of the issue when it comes to complying with the new standard. A wide variety of leasing arrangements complicate the compliance with new rules including intra-company lease transfers, sub-leasing and embedded options. Furthermore, US (ASC 842) and International (IFRS 16) lease accounting rules are distinctly different, challenging multinational companies to deliver multi-GAAP financial reporting.
“Some leading multi-nationals have realized that they were on course to hit a ‘leaseberg’ and have mobilized their teams to achieve compliance with new lease accounting capabilities. Many others, unfortunately, have not realized the real-world accounting challenges required to achieve compliance and gain control over the lease liabilities that will need to be managed on their balance sheets,” Chapman said.
The new lease accounting standard changes accounting for lease transactions and will move hundreds or thousands of lease contracts onto a company’s books. All leases over $5,000 need to be disclosed. For global companies, leased assets need to be accounted for consistently regardless of where assets are stored. Some companies have reported that the new lease accounting standard will necessitate 66 times more journal entries than were previously required.
“The new leasing standards are an accounting nightmare. A global technology brand recently approached us with over $2 billion of operating leases. Applying the new accounting standard was going to have a huge impact on their business and they needed to understand exactly how new rules would affect their financial position,” Jeremy Suddards aptitude software chief revenue officer added.