Are Retailers Prepared for New Lease Accounting Standards?

Posted on June 20, 2016

A retailer can accomplish plenty in two and a half years, but 61.2 percent of industry professionals say they are concerned about their readiness to meet updated lease accounting standards from the Financial Accounting Standards Board (FASB), which are set to go into effect in 2019, according to a recent study by consulting firm Deloitte.

The updated accounting rules, released in February, call for financial and accounting professionals to bring detailed information about their companies’ operating leases onto the balance sheet. All data related to leases on stores, distribution centers and equipment will be affected.

This puts operating leases onto a much bigger stage and brighter light than they are used to.

Previously, information on operating leases was usually mentioned in the footnotes.

The changes offer investors and the general public significantly increased disclosures and transparency, but also present retailers with several compliance challenges, according to Sean Torr, a director at Deloitte Advisory, who is leading the firm’s efforts to help companies understand and adhere to the new standards. The requirements apply to companies in all industries, but retail is one area where companies often have leases on hundreds, maybe thousands of properties, and where the impact is likely to be greater.

Of the 5,400 financial and accounting professionals who responded to Deloitte’s survey in March, only 9.8 percent said their companies were prepared to comply with the new rules. The study also found that:

  • 33.3 percent of participants said creating a centralized, electronic reporting to implement the new standard was a challenge;
  • 20.5 percent of respondents were concerned about new reporting processes.

Getting ready for the new challenges might be daunting, but change has been about 10 years in the making, and now industries are facing implementation in 2019.

An essential step: prepare a centralized system for reporting

Accounting professionals are particularly concerned about how to put centralized systems into place to manage the new reporting requirements.

“Most companies are in a strategy and assessment stage,” Torr says. “The challenge is driven by the volumes of data needed, and the complexity of getting these multiple data elements into one place.”

Retailers will have to submit data now that they were not required to in the past, such as payment streams and the renewal options that are reasonably certain to be exercised during the term of the lease, according to Torr. The FASB will also require companies to provide details about options at the back end of leases, incentives and discount rates.

“Existing operating lease accounting requirements did not have a systematic need for reporting this information, for real estate and non-real estate leases,” Torr says.

FASB started developing the new lease accounting rules about 10 years ago. In that time, several senior executives at retailing companies hoped to convince FASB to streamline some of the reporting requirements. For instance, a previous version of the updated standards called for retailers to report variable lease payments, which would be based on store sales performance or usage in certain cases. Robyn D’Elia, vice president and controller at Bed Bath & Beyond, suggested in a September 2013 comment letter that a lease liability would not exist until all specified conditions for a contingent rent had occurred.

“For the company, it’s generally the attainment of a certain sales level in a specified period of time that triggers contingent rent payments,” D’Elia wrote. “Estimating these sales levels years in advance on a store basis would have produced unreliable results and would have required routine reevaluation.”

It was one area where FASB made concessions with industry accounting professionals, in order to make reporting essential data much easier.

“The rules around variable lease payments have been streamlined,” Torr says. “Variables are excluded from the measurement. It relieves companies from having to estimate the variability of payment into the future. Instead, those variable lease payments are recorded in the applicable year, without estimating future payments.”

New rules focus on the actual fixed payments in a contract, lease payments driven by an index or payments that are essentially fixed.

Concessions will not relieve retailers from the requirements of fuller disclosure, however.

Deloitte professionals say the best way for retailers to manage the task is to create a detailed roadmap and timeline to help them manage the tasks of putting the centralized data management system into place, and rounding up the data that will be processed.

“There is sufficient time, but companies should not underestimate the amount of effort needed to complete these activities,” Torr says. “Time is moving quickly, so it is prudent to get started.”