Organizations struggling with lease accounting deadline

According to a KPMG survey of almost 400 companies, many companies are still struggling with challenges that are making it hard to reach the implementation finish line. Compared to last year, some progress has been made, particularly in selecting a lease accounting software (up from 18% to 54%).

However under half (40%) had performed a lease inventory, up from 29%, and only small improvements have been made in other key activities, such as collecting and validating data (from 4% to 11%) and completing an accounting assessment (from 13% to 19%).

One-third (33%) of respondents identified embedded leases as the biggest implementation challenge. Abstracting and entering leases into a leasing system was the second most challenging implementation issue according to 28%, while integrating a lease accounting system into an existing system was also viewed as difficult by 24%.

Marybeth Shamrock, KPMG’s advisory lead for leasing, said: “Companies are working hard to achieve implementation but clearly there are significant challenges.”

In addition to the longer than anticipated implementation period, firms are finding costs higher than estimated, and 65% expect cost increases this year as compared to only 39% in 2017. Of those respondents, new lease accounting software was the most cited issue at 30%, followed by use of outside advisors (26%).

Donald Coduto, a director in KPMG’s Accounting Advisory Services, said: “Legacy systems are challenged to implement the new regulations and firms are buying new leasing software to address this issue which is increasing costs.

“At the same time, firms are finding that internal resources are often too strained, or lack expertise, to handle the added workload of implementation and contract outside advisors for assistance, again increasing costs. As the deadline is under six months, some firms are scrambling to achieve compliance on time, which can also lead to increased costs.”

Deloitte’s research findings paint a similar picture. The firm says companies are struggling with the treatment of various lease data inputs, particularly as embedded leases are not likely to be labeled as “leases” within larger agreements, making them difficult to identify, centralize and calculate.

It highlights this as a particular challenge in service industries where, for example, IT service contracts may have embedded server leases or transportation contracts may have embedded leases for railcars.

Deloitte’s poll of more than 2,000 executives found evidence that confidence in the processes needed to comply is falling. Nearly a third (29.5%) said they feel unprepared to comply, almost twice as many as the number that said they feel prepared (15.6%).

Just 28.5% intend to use prior leasing software solutions with little or no modification for lease accounting implementation.

James Barker, senior consultation partner for lease accounting at Deloitte, said: “Many of the IT solutions in the marketplace aren’t necessarily able to be implemented off-the-shelf and require customization, necessitating additional effort around readiness for implementation of the standard.”

(story updated 13/08/2018)