Months from the January 1, 2019 deadline, public companies are struggling to address embedded leases, lease abstracting and integrating new lease accounting software within legacy systems in their efforts to achieve compliance with the Financial Accounting Standards Board (FASB) new lease accounting standards. A full third (33 percent) of nearly 400 respondents in KPMG’s Leases Standard Survey replied that embedded leases are the biggest implementation challenge. Abstracting and entering leases into a leasing system was the second most challenging implementation issue according to 28 percent of respondents. Integrating a lease accouting system into an existing system, according to 24 percent of respondents, was the third most challenging issue.
“Companies are working hard to achieve implementation but clearly there are significant challenges,” said Marybeth Shamrock, KPMG’s Advisory lead for Leasing.
Detailed findings of the survey can be found here.
Respondents to the KPMG survey included 393 finance and accounting professionals in financial services, manufacturing, retail, telecom, and media industries (75 percent public companies). Nearly half of the firms polled have at least 500 leases and almost two-thirds have annual revenue of $1 billion or more.
Costs of Implementation Exceeding Expectations
In addition to the longer than anticipated implementation period, firms are finding costs higher than estimated. A full 65 percent of firms surveyed expect cost increases this year as compared to only 39 percent anticipating cost increases in 2017. Of those respondents, new lease accounting software was the most cited issue at 30 percent. Use of outside advisors due to internal resource constraints was the second most cited issue at 26 percent.
“Legacy systems are challenged to implement the new regulations and firms are buying new leasing software to address this issue which is increasing costs,” said Donald Coduto, a director in KPMG’s Accounting Advisory Services. “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.”
Shamrock added, “Companies behind schedule will undoubtedly use interim measures to satisfy their reporting requirements which may not reflect the desired end state. Companies with significant implementation work remaining may backload implementation efforts, similar to implementation efforts around Revenue Recognition.”