4 Takeaways on ASC 842 and IFRS 16 from the 17th Annual Financial Reporting Conference
Earlier this year, we had the opportunity to attend the 17th Annual Financial Reporting Conference at Baruch College featuring panelists from FASB, KPMG, Google, Moody’s, and Financial Reporting Advisors, LLC.
The panel was an honest conversation about what companies need to know to implement the new lease accounting standards. The new standards affect in-house accountants, CPA firms, auditors, and credit rating agencies – and we learned quite a bit by listening to points of view from across the accounting and finance sectors.
Here are our 4 takeaways:
Takeaway #1: Using a “bottom-up” approach to identify your leases
Amie Thuener, Chief Accountant for Google, said that, in addition to a “top-down” approach of looking at the company’s 10-K disclosure notes commitment, they’ve also identified leases by taking a “bottom-up” approach. The bottom-up approach involves looking for certain words in their general ledgers and purchase orders, such as “storage,” or “truck.”
Contracts containing those words may be considered a lease or contain embedded leases. Adding this step to your lease inventorying process is a good way to make sure your lease inventory is complete. Get more tips on how to build your lease inventory here.
Takeaway #2: Credit rating agencies will be examining disclosures with a fine-tooth comb
While this isn’t a new revelation, it’s one that affirms what most of us were thinking. Mark Lamonte, Managing Director of Moody’s Investor Services, said that he expects that he and other credit analysts will likely be looking closely at disclosures to ensure that they are comprehensive.
To hear this from an actual credit agency really drives home the point that companies should be prepared to spend much more time gathering the data needed to prepare their disclosures and check them for accuracy.
Takeaway #3: Don’t reassess the set percentages for the 3rd and 4th classification tests
One of the biggest changes with the new standard is how leases are classified. There are now 5 tests that you must perform, and the bright lines for the 3rd and 4th tests have been removed.
You should determine your own internal policy of what the threshold will be for those tests, document it, and follow it consistently. Don’t use the new guidance as an opportunity to create new methods. Keep your work simple for yourself. The point? Establish a policy up front and stick to it.
You don’t have to make up your own policy at all. This free tool enables you to classify your leases correctly and provide the support your auditors require.
Takeaway #4: Look closely to make sure you’re accounting for separate components of a contract correctly
To comply with the new standards, you’ll need to evaluate each contract to identify multiple leases within a lease, separate lease and non-lease components, and account for them properly. This is just one of the aspects of the new standards that will require lots of legwork and expertise to do accurately.
However, there is one way to simplify it. You can group components by class of asset. For example, you can group non-lease components, like maintenance, together for all of your heavy equipment leases to make your work a little less cumbersome.
It can be easy to get bogged down with your own day-to-day work and it’s good to hear from a wide swath of industry professionals about their thoughts on ASC 842 and IFRS 16. We hope these takeaways help illuminate some of the issues you may be facing.