$2 trillion comes on balance sheet

The Wall Street Journal has calculated that the total impact of the new leasing standard on US companies’ balance sheets could be as much as $2 trillion.

In a briefing note, US professional service firm PwC says that lessees with a large portfolio of leases are likely to see a significant increase in balance sheet assets and liabilities. However, the dual model for income statement classification is expected to limit the impact of proposed changes on the income statement and statement of cash flows.

Identifying which arrangements contain a lease will require judgment and may not always be a straightforward determination, PwC says. While the accounting for sale-leaseback transactions will become easier for transactions involving real estate, it may become more complex and time consuming in other cases.

Beyond the financial reporting impact, the new guidance is likely to require changes to lease systems and related controls. Based on the effective date and the need for retroactive application to prior years, PwC advises lessees to focus on their ability to gather the required information on existing leases and capture data on new leases, which will be critical to an effective transition. In some cases, new systems, controls, and processes may be warranted, which will take additional time to obtain or develop, implement, and test.

With the expected issuance of the standard in early 2016, companies will have only three years before they begin reporting under the new guidance. Companies that have not done so already, are encouraged to think through the potential impact, particularly in light of the requirement to retroactively apply the standard to previously issued financial statements. The timeline for adoption will be even shorter to the extent a company plans to early adopt the standard.