Lease accounting standards changes expected to cost millions

Companies are expanding budgets to accommodate the new lease accounting standard, turning to interim solutions, temporary workers and outside consultants, many expecting to spend millions of dollars on the effort. , according to a new survey from Ernst & Young.

Almost half of the companies surveyed by EY predict a cost of between $ 1 million and $ 5 million to implement the changes to the new rental standard. Multinational and national companies cited a number of factors as obstacles to successful implementation of the new standard, including complexity of systems, fragmented data collection and reconciliation, data quality and outdated legacy systems. .

More than 80% of the companies surveyed indicated that they are working on the design of a long-term automated solution for lease accounting. More than half of companies (51%) using a long-term automated solution plan to use artificial intelligence. Of those companies that have already chosen a long-term system, 86% said they also plan to implement interim solutions to meet the looming deadline.

The use of external resources has increased among companies as budgets have swelled to meet the looming deadline. Forty-five percent of companies surveyed said they were looking to temporary workers to support the lease accounting change this year, up from 17 percent in 2017. More than half of them (56 percent) use consultants, an increase of 16 percent. over 2017. Almost half of the companies surveyed (47%) said they anticipated a cost of between $ 1 million and $ 5 million to implement the changes just for leases. Last year, only 28 percent said the same.

The Financial Accounting Standards Board and the International Accounting Standards Board have worked for nearly a decade to converge their lease accounting standards. Although significant differences remain, standards under US GAAP and International Financial Reporting Standards will place operating leases on the balance sheets of many companies for the first time. For public companies in the United States, the standard takes effect for the years and interim periods within those years, beginning after December 15, 2018, so for a business of a calendar year, it would come into effect on January 1. 2019. For private companies, the standard is in effect for fiscal years beginning after December 15, 2019 and for interim periods in fiscal years beginning after December 15, 2020.

Despite the challenges, 85% of the 304 financial and IT managers of US-based public companies surveyed said they were on track to meet the deadline required by the new leasing standard. The rest admitted that they were struggling and may not have had a fully functioning system in place by the deadline.

“Meeting the new lease standard has become a bigger and more complicated business than many companies originally anticipated,” said Anastasia Economos, Lease Manager for EY Americas, in a statement. . “From choosing a system and collecting all relevant data from across the organization to deciphering contracts and identifying integrated leases, putting together the data and IT puzzle, in particular for complex global organizations, is at the heart of the challenges many businesses face, but also necessary for successful implementation.

Data collection is proving difficult in many organizations, especially for multinational companies. Eighty-three percent said inventorying and collecting data for leases internationally was difficult, while 78 percent said the same about US data. More than three-quarters of those surveyed (78%) said it was difficult to find the resources and skills within their current IT team.

The recent requirement to implement the revenue recognition standard before the rental standard is proving difficult for many companies. More than half of companies (51%) describe their experience of implementing revenue accounting changes as very difficult, while 72% of respondents anticipate significant changes in systems and processes after implementation initial.

“A number of companies have been able to apply the lessons learned from implementing the revenue recognition changes to the new rental standard,” John McGaw, accounting change manager at EY Americas, said in a statement. “And with leases turning out to be an even more complicated process, the effective date is not the end of the road. Knowing that most businesses are still grappling with the necessary revenue recognition changes two quarters past the 2018 deadline, it’s easy to anticipate the same will be true of leases.

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