Lease accounting changes hit balance sheets

Three-quarters of the US companies with the biggest leasing commitments have reported a material impact on their corporate balance sheet caused by changes to lease accounting standards.

The claims are contained in analysis by software specialist LeaseAccelerator of regulatory disclosures made to the Securities and Exchange Commission (SEC).

The disclosures follow Financial Accounting Standards Board (FASB) changes to the lease accounting standard. ASU 2016-02, Leases (Topic 842) makes significant changes to the balance sheet of lessees by requiring many more leases to be recorded.

The report includes comments issued by the 100 US companies with the largest dollar value of leasing obligations. Of the top 100, 76% said there will be a material impact resulting from the transfer of most right-of-use assets and liabilities on to corporate balance sheets.

Another 20% are still analyzing the potential impacts of the new standard. Only 8% provided quantitative estimates of the material impact to the balance sheet, which ranged from $1.2 billion to $13 billion.

While just over one quarter (28%) of the top 100 reported that there will not be a material impact to their income statement from ASC 842, the majority (66%) are still analyzing the impacts.

The analysis also suggests some companies may be on the back foot, as 18% are evaluating or implementing new policies and controls to support the standard and the same proportion are evaluating or have selected a lease accounting software application.

Only 13% indicated that a project team had been formed to address the new standard.

Michael Keeler, CEO of LeaseAccelerator, said: “As expected, the SAB 74 disclosures confirm that most companies are expecting a material impact to their balance sheets when they adopt ASC 842 and IFRS 16.

“However, the lack of implementation progress suggests there is still a long road to compliance for many large lessees, each of which will need to implement new Enterprise Lease Accounting systems, policies and controls.”