The Financial Accounting Standards Board’s new lease accounting standard doesn’t take effect for public companies until January 2019 and then January 2020 for all other organizations. But if there’s one thing financial professionals have learned from their revenue recognition adoption efforts, it’s never too early to start the process.
Revenue recognition has paved the way for lease accounting in that it has helped firms build processes that they can use to adapt to new regulations. In a recent survey from Robert Half and Protiviti, a Robert Half subsidiary, 83 percent of finance executives said that they hope to use some of the knowledge acquired during that process to help them get through the changes in lease accounting.
But past experience is not a substitute for current action. The same survey also shows 56 percent of the finance leaders interviewed have not yet begun the transition to the new standard. Of the companies with fewer than 50 employees, only 37 percent have started their process. Given the complexity of the new lease accounting standard, procrastination is a risky approach.
“Companies cannot underestimate the amount of work required for the new lease accounting standard,” says Tim Hird, executive director of Robert Half Management Resources. “Firms that haven’t started risk being in catch-up mode the moment they do and scrambling to find experienced professionals who can quickly step in to help organizations meet the new guidance.”
View infographics for 22 U.S. cities to find out how organizations in those areas are progressing with adopting the new lease accounting standard and the pain points they’re experiencing. Also, see data tables by company size and industry.
What’s changing in lease accounting
The new standard will put an end to off-balance sheet accounting in relation to leasing and redefine common metrics such as gearing ratios. Given the prevalence of leasing — including common office items like coffee machines — and renting, the new adjustments to the standard will impact almost every organization across industries.
From an operations point of view, the lease accounting standard has a significant impact on accounting and finance functions. It will require your department to:
- Update software or install new systems
- Write new accounting policies and procedures
- Train staff and offer support through the transition period
- Guide clients as they review their approach to leasing
- Take a proactive approach to change management
These and other steps take time. The earlier you start, the readier your department will be to comply with the new standards.
Adopting the new standard: 7 steps
As with revenue recognition, transitioning to the new lease accounting standard is best approached as a change management project. It should include these seven steps:
1. Analyze the current state
Every company should have a dedicated steering committee to oversee each step of the transition. Begin with a full diagnostic and readiness assessment to determine the required steps. Map processes, chart capabilities and form a full picture of where you are so that you can identify the areas that will need to change.
2. Educate senior management
All decision makers in the organization need to be brought up to speed on the implications of the new standard. This group should include non-accounting staff, such as the chief technology officer (CTO) or vice president of IT, who are likely the people overseeing software and system changes. The transition committee may want to bring together additional stakeholders to talk about what the new standard means at an executive level.
3. Identify the staff who will be involved in the process
The next people to speak with are the employees who will implement the standard on a day-to-day basis. They will have plenty of questions about how this affects their role, what additional duties they’ll have and how they’ll be trained. These workers will also have insights into the transition. So, make sure the steering committee has a mechanism in place to get their ideas and feedback.
4. Train your staff
Before implementing new processes, everyone on your team will need to know not only what additional duties they’ll have, but also how to carry them out. Remember, training shouldn’t stop until everyone is comfortable with the change. Hold periodic brush-up courses to ensure employees are following best practices.
5. Identify internal skills gaps
Can your present team handle all the necessary tasks during and after the transition? The only way to know for sure is to make a current assessment of which elements of the process your employees can — or can’t — handle.
6. Determine whether more support is needed
If you find that your existing staff can’t manage all elements of the transition alone, you’ll need to tap outside resources to complete the project successfully. Resources could include a trainer to teach new skills or a project consultant who can help the entire department through the transition. You may even want to add a specialist, such as a property accountant or revenue accountant, to your team.
7. Communicate milestones and deadlines
As the transition moves forward, make sure everyone gets a regular heads-up on target dates that affect them, especially as any deadlines change. Clear communication from management is critical: Too often projects fall behind because employees forget or aren’t sure when something is due. Don’t micromanage or pester your team members. However, do check on individuals’ progress and give reminders as warranted.
The new lease accounting standard is a major change, and it’s best to start the transition sooner rather than later. So, assemble your team, train your staff, and consider bringing in specialized consultants and change management experts when the need arises. Engaging a managed services provider may be another option to consider, depending on the scope and complexity of the work needed.
“Adopting the new standard requires a substantial effort to prepare a firm’s people, processes and systems,” says Chris Wright, managing director of the financial reporting remediation and compliance practice for Protiviti, a Robert Half subsidiary. “For example, identifying and implementing a lease administration system and abstracting relevant data from leases require a significant investment of time and resources. Although lessons learned from the revenue recognition transition are valuable, not every organization was as impacted by that standard as they will be by new lease accounting rules.”
For more insights on the new lease accounting standard, see Protiviti’s Flash Report on this topic.