By Elizabeth Lynch
Embedded leases, discount rates and determining the lease term are just a few topics companies are grappling with as they head toward the finish line for implementing the new lease accounting standard (ASC 842). This is in addition to challenges many companies are facing to implement new or enhanced leasing systems and abstract existing leases for the data needed to apply the new standard.
For calendar year-end public companies, the January 1, 2019 implementation deadline is just a few weeks away. Public companies with off-calendar fiscal years have additional time. The changes go into effect for private companies one year later than for their public company counterparts.
Accounting questions about applying the new standard have significantly increased as companies work their way through the final stages of the implementation process, said Audit Partner Scott Muir, the lease accounting team co-leader.
“Many companies still have significant work to do before the effective date,” said Muir. "For some, the time needed to implement the new lease accounting standard will exceed their expectations."
It is important for auditors to be in close communication with management and the audit committee to ensure that implementation of the new lease standard is a priority, and that the need for appropriate internal controls over transition and ongoing processes are incorporated into the company’s implementation plans, Muir added.
The new standard from the Financial Accounting Standards Board requires companies to account on their balance sheets for all leases with a term of more than 12 months. The standard will move an estimated $2 trillion of operating leases onto corporate America's balance sheets. That’s a fundamental shift in how companies account for and report their leasing activity in the financial statements. And while lessors are less affected by ASC 842 than lessees, there also are important changes for them that they, and their auditors, should not overlook.
To learn more or to arrange an interview with Muir or other KPMG leaders, please contact Elizabeth Lynch.