In our last post, we discussed new accounting standards that will change how organizations recognize revenue. Accounting Standard Codification (ASC) 606 was issued in May 28, 2014, by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) to make U.S. and international standards more consistent. The changes go into effect Dec. 15, 2017, for public entities and certain employee benefit plans that report under U.S. Generally Accepted Accounting Principles (GAAP), and Dec. 15, 2018, for private entities that report under U.S. GAAP.
Implementing ASC 606 is not just a headache for the finance department. IT will be heavily involved in any system, software and workflow changes. What’s more, ASC 606 isn’t the only accounting rule changes IT will have to deal with.
The FASB and IASB issued updated lease accounting standards, ASC 842 and IFRS 16, on February 25, 2016. The new rules require lessees to report an asset and liability on their balance sheets for most leases, and account for leases that are “embedded” in other contracts. Lessors will have to change their accounting methods to align with the lessee requirements and the new revenue recognition standard.
The lease rules will likely have a significant impact on small to midsize businesses (SMBs), which tend to rely on leasing when budgets are tight and bank funding is limited. Commercial real estate and vehicles are commonly leased. In addition, leasing has long been an attractive option for obtaining IT equipment.
The operational, financial and strategic advantages of IT leasing are numerous. The ability to conserve capital and shift costs from capital to expense budgets are important reasons to lease. Leasing also provides protection against obsolescence by helping to maintain technology refresh cycles.
Of course, leasing is not a complete no-brainer. When considering technology leasing, it’s important to look at the total cost of ownership (TCO) associated with the equipment. After all, the initial purchase price is generally less than half of that total cost. Maintenance, support, training, upgrades and the ultimate disposal of the equipment make up the remainder. As with any technology procurement decision, these factors impact the value of leasing.
And now organizations will have to consider the impact of the new accounting standards. Finance, IT and legal experts will also have to evaluate whether co-location and hosting arrangements and even certain “cloud” services contain embedded leases that must be accounted for under the rules. (PwC has published this guide that discusses how the new standards could affect certain technology-related transactions.)
The new leasing standards must be reflected in balance sheets starting in 2019 for public companies and 2020 for private companies. In a survey conducted in May by CBRE and PwC, only 25 percent of financial executives said they had started the implementation process, with 52 percent assessing the impact. Almost half (47 percent) of executives who have started implementation said that the efforts required are greater than expected. The new rules are likely to affect budgeting, contract negotiations, accounting systems and a wide range of business processes.
However, executives see several potential benefits from compliance with the new standards. Forty percent of companies believe they will have improved lease portfolio reporting, while 35 percent anticipate greater visibility into key leasing costs and improved lease portfolio administration.