New standards for lease accounting became effective on 1 January for companies with calendar year ends – but research from KPMG shows that some organizations have fallen behind with their projects and will now be using interim solutions to enable compliance workarounds while they complete their full lease accounting changes.
KPMG’s survey of over 800 companies from around the world – the results of which are presented in a new report, Lease accounting is here: are you ready? – found that two thirds (67 percent) admitted they were not on track with their lease accounting projects due to challenges they were facing.
As little as 90 days before the effective date, only 3 percent of companies had completed their projects. Only one in seven (16 percent) had developed their system requirements and just 13 percent had designed their software solution. With systems implementation alone likely to take 4-6 months, it is clear that a significant proportion of companies will not yet have completed their work and so will now be relying on temporary fixes – often manual, involving the use of spreadsheets to collate data.
Markus Kreher, Global Head of Accounting Advisory Services at KPMG, commented: “It is perhaps no surprise that companies’ lease accounting projects have proved challenging, given the scale and complexity of the task. To some extent, we saw a similar picture with the standards on revenue recognition and financial instruments that came into effect a year ago. The priority now is to ensure that, where workarounds are being used, they are robust and that there is a clear path to reach the end-state solution as soon as possible.”
As the scale of the task has become clearer, so too have companies’ estimate of the costs involved has risen. Nearly two thirds (62 percent) of organizations say that their expected total cost has increased. For nearly a quarter of businesses (23 percent), the total cost is expected to be over US$500,000. However, at the time of asking, nearly a fifth (18 percent) of companies admitted they did not know what the cost was likely to be.
KPMG’s research also uncovered some significant regional variations. Companies in ASPAC were generally further behind those in the Americas and EMEA. At the time of surveying, less than half (47 percent) of companies in ASPAC had even formed a project management team. However, many companies there will have extra time as non-calendar year ends, such as 30 June, are more common, particularly in Australia.
Companies in ASPAC are also more likely to be planning a manual approach to achieving compliance with the new standard. Only a fifth (22 percent) of ASPAC businesses said they are in the process of implementing a new lease accounting system, compared to 42 percent of businesses in the Americas and EMEA. Even in the Americas and EMEA, a surprising proportion of organizations are taking a spreadsheet approach – 29 percent and 27 percent, respectively.
The top four challenges that companies were facing, according to KPMG’s research, included:
- Identifying embedded leases (such as those within larger service or supply contracts)
- Establishing an appropriate incremental borrowing rate (IBR)
- Abstracting and entering leases into a leasing system
- Integrating a lease accounting system into the existing system environment
To deal with these challenges and the overall complexity of the project, a quarter of companies have requested extra budget and resources to allocate to both hire resource internally and externally.
Dean Bell, Head of Accounting Advisory Services at KPMG in the US, said: “Companies that haven’t yet been able to complete implementation of a new lease accounting process and systems can still complete their full solution over time. This is advisable from a financial as well as a process efficiency standpoint, as capital investments in an automated solution are likely to make the entire leasing process more cost-effective in the long run.
“Particularly in larger companies or those with an extensive portfolio of leases, an automated solution is likely to be far more efficient than relying on manual, spreadsheet-based processes. There will be an ongoing need to handle and maintain any lease modifications, account for re-measurement requirements, ensure the completeness of the lease inventory, and determine the incremental borrowing rate. This could prove onerous without an automated system solution given a sizeable lease portfolio.”