As mandated by regulators, Sealed Air is implementing the new standard for accounting for leases on time.
The standard will come into force on January 1, 2019 for public companies and one year later for private companies. The implementation forces public companies to restate 2017 and 2018 and private companies to restate 2019.
Sealed Air began preparations in 2016 and will be increasing its time and effort this year to put all leases on the balance sheet.
This means the multinational manufacturer of packaging materials will work harder on implementing the new lease accounting standard as efforts to implement the new revenue accounting standard are in full swing. This is a challenge that many companies face in 2017.
“The burden on organizations for financial reporting change will be greater in 2017 and 2018 than we have seen in recent history,” said Sean Torr, CPA, CGMA, manager of rental accounting services at Deloitte. “These are two important standards that impact a large number of transactions within a company.”
Planning ahead, he said, is crucial to avoid having to redo things, find synergies and minimize disruption.
Sealed Air, for example, hired two accountants to help implement the two standards one after the other, said Michael Leon, CPA, assistant corporate controller at Sealed Air.
“The revenue recognition goes into effect in 11 months and a year later the leases,” he said. “We, like many companies in our position, put the preponderance of resources on the revenue standard first, and then whatever time and effort we have left, we put the hire standard. “
Understanding the changes required by the two standards has already taught the company a significant efficiency lesson, Leon said. A diversified manufacturer with customers in 169 countries, Sealed Air acts as a lessee and lessor of equipment. The work done to adopt the revenue recognition standard has proven to represent the bulk of the work that needs to be done on the lessor side of the business to implement the lease accounting standard.
The tenant side of the business will be a tenant-inventory inventory exercise that will escalate this year, Leon said.
Of more than 3,300 accounting professionals surveyed by Deloitte in October 2016, 33.8% said they were somewhat prepared to comply with the new lease accounting standard. Another 13.8% of those polled said their businesses were extremely or very prepared, and 28% said they were not too or not at all prepared. Leon considered Sealed Air somewhat prepared.
Almost a quarter (23.6%) of state-owned companies and 36.4% of private companies adopt the lease accounting standard within the deadlines prescribed by regulators, according to the Deloitte survey. Another 4.8% of public enterprises and 6.7% of private enterprises are early adopters.
Survey respondents said their companies would redouble their efforts this year to collect the necessary data on all leases in a centralized electronic inventory (24.7%); implement several new accounting standards (16.3%); determine where to start the implementation process (15%); and determine if the IT solutions currently in place for tracking rental data can manage the implementation and compliance with the new standard (9.4%).
The time and effort required to implement the new lease accounting standard will vary from company to company. Depending on the number of leases held by a company, the distribution of the lease portfolio and the systems already in place, Torr estimated that it would take three to 18 months to collect the data and establish the electronic custodian.
To streamline implementation, he recommended these five strategies:
- Establish diligent governance, such as steering committees, project management teams, and progress monitoring and communication, to make the most of the potentially vast resources needed to implement changes.
- Evaluate the changes the new lease accounting standard will bring to the business and customize the implementation plan based on the assessment. For multinational enterprises, this should include assessing the differences between international financial reporting standards used by subsidiaries and GAAP.
- Maximize the use of technological tools to collect, analyze and report data in the corporate lease repository and calculate assets and liabilities.
- Prepare and update all stakeholders on changes to minimize disruption caused by implementation. This includes employee training and a communication strategy.
- Establish rigorous processes and internal controls necessary to ensure that the lease repository is complete and that any lease changes are tracked and reported.
–Sabine Vollmer ([email protected]) is a JofA senior editor.