Accounting for leases: A moving target

While leasing is an important tool, enabling companies to use property, plant, and equipment without making large initial cash outlays, the practical application of the sometimes form-driven, often complex, accounting literature can be challenging.

Lessee motivations are as varied as the applicable accounting – and leases, particularly those governing real estate, often have a material impact on financial statements. Highly tailored arrangements such as leases of assets to be constructed or significantly improved, real estate sale-leasebacks, synthetic leases, master lease arrangements, and vendor financing arrangements present additional challenges.

And there’s significant potential change on the horizon as well. With critics charging that current lease accounting rules often do not portray the true economics of lease arrangements – and many constituents agreeing that greater transparency is needed in these kinds of off-balance-sheet obligations – the standard-setting boards are pushing for change.

The “set it and forget it” mindset for lease accounting: Soon to be “null and void”

The FASB and IASB are moving forward with a lease accounting overhaul that will bring substantially all leases onto the balance sheet of lessees and may change expense recognition, impacting many key financial metrics.

These new accounting standards will have far-reaching impacts on your business processes, systems, and controls. Compliance is likely to drive significant business process change across the enterprise – from finance and accounting, IT, procurement, tax, treasury, legal and operations, to corporate real estate, and even HR.

Lease accounting is about to become more complex, and more time-consuming – on an ongoing basis. If your company will be affected, you should begin now, in a measured way, to prepare the systems and processes to enable the data capture required by the proposed changes.

The PwC solution

Navigating the complex, and changing, leasing guidance – and applying it to the specific facts and circumstances around your business – requires a deep understanding of the applicable standards and lease application processes. Getting it wrong could have an adverse impact on your business beyond just the financial statements; the effect on debt covenants or a proposed capital markets transaction can also be significant.

PwC’s global team of lease accounting and advisory professionals is here to help. We can advise you early in your lease negotiations to help you understand the applicable guidance and common pitfalls that can impact the accounting. We can also assist you in understanding the proposed leasing standard while helping you manage the impact on your business processes.

We have developed an innovative new technology platform to help bring ease and clarity to the accounting change process directly to your desktop. The GAAP Accelerator® embeds the important steps necessary to plan, manage, and execute implementation of the proposed leasing changes — breaking down the steps into a comprehensive, intuitive workflow that can be tailored to your needs. The GAAP Accelerator® enables intuitive, fluid collaboration: it allows you to assign tasks and deadlines directly; record and report on issues; review comments and get speedy approvals – everything you need to manage your projects effectively.

Contact us to learn more about how we can help you ensure your financial reporting will be compliant with the proposed new standard – and manage your lease business and process transformation in an efficient and measured way.