Being the controller of a successful global automotive company has never been easy, and the recent activity of the accounting standard setters may be adding to the challenges. Transformation of the existing lease account rules is expected to have a significant effect on both global and domestic automotive companies.
Companies with large operating lease obligations will be the most severely affected. The impact will generally arise from the lessee accounting rules although there will be situations when the lessor rules come into play, such as contracts with rental car or fleet companies. In addition, there are significant changes to sale-leaseback accounting―which will affect both seller-lessees and buyer-lessors―as well as to the replacement of the current build-to-suit lease guidance for companies to consider.
The new Financial Accounting Standards Board lease accounting standard, ASC 842, is effective for public business entities for fiscal and interim periods within those fiscal years beginning after Dec. 15, 2018, a year after companies must adopt an even bigger accounting change regarding revenue recognition. For a public company with a calendar year-end, ASC 842 is effective on Jan. 1, 2019. ASC 842 is effective for private companies with a fiscal year beginning after Dec. 15, 2019.
While 2019 may seem far off for year-end public companies, planning should begin now in order to ensure an effective and efficient implementation of the new standard. Most companies do not have a centralized database with all leases and required data elements needed to implement the new standard. For example, while this type of a database may be in place for real estate leases, it is often not in place for equipment leases. Companies will need to collect leases and do the following:
- Analyze data, such as extension options, discount rates, lease and non-lease components, and income tax considerations
- Evaluate existing processes and systems in order to obtain and maintain the data, including budgeting, key metrics, debt covenants, internal controls and the like
- Transform from paper documents to sustainable technology solutions
- Identify financial reporting changes such as new footnote disclosures needed to comply with the new accounting standard
- Manage a lease portfolio and shareholder value from a different strategic perspective over the long term
In addition to equipment and real estate leases, certain contracts common to the automotive industry may result in a different accounting conclusion than under previous generally accepted accounting principles. Supply contracts between an original equipment manufacturer and an automotive parts supplier, for example, may include a lease. Under existing GAAP, embedded leases were off-balance sheet operating leases. But under the new guidelines, the company will recognize a right-of-use asset and a lease liability for virtually all leases.
Supply contracts between an OEM and an APS may include a minimum volume as well as a take or pay commitment. The existence of these rules needs to be considered in assessing and allocating contract consideration.
Additionally, OEMs enter into arrangements with rental car or fleet customers, which have historically met the definition of a lease due to the existence of incentives such as repurchase options or residual value guarantees. Under the new guidance, OEMs may need to evaluate any incentives under the revenue recognition guidance, depending upon facts and circumstances.
Companies are making plans to devote time in 2017 to the new requirements around lease accounting. The 2019 start date for implementation will be here sooner than you think.
