The new lease accounting standards will make financial statements more transparent and comparable by requiring organizations to report operating lease liabilities on the balance sheet. But will the lease accounting standards have other consequences?
With the average Fortune 500 company carrying between $100M and $1B+ in operating lease obligations, most of which will soon be reported as liabilities on the balance sheet, we look at some potential ways the IFRS 16 standards may change CFO behavior.
More scrutiny around lease vs. buy decisions
When the standard was first released, many forecasted that adding leases to the balance sheet would swing companies heavily toward purchasing assets. One study by Chang and Adams Consulting projected that up to 3.3 million jobs could be lost in various industries as corporations shifted away from leasing towards purchasing assets due to the change in accounting treatment (source).
We can’t predict the long-term shifts in lease/buy trends, but it is highly probable that the decision to lease vs. buy will become much more important, driven by the finance department and backed by data analysis (appreciation vs. depreciation, capital vs. operating lease structure etc.)
More aggressive lease management and negotiations
Given the impact of leases on the financial statements, lessees may look to be more aggressive in the negotiation of lease terms (perhaps preferring shorter lease terms) or look to do more negotiations on an enterprise-wide basis. Organizations may put in place more consistent and controlled business processes to tightly manage lease payments, expirations or other lease activity to prevent cost leakages.
More informed, data-driven leasing insights will empower finance
While a shift to the new lease accounting standards will bring some short-term pain as companies rush to comply, there is, to some degree, a silver lining.
Currently, most companies do not have centralized lease data and may not be able to get a holistic picture of their lease spend or portfolio. As organizations adopt new technologies to help them achieve compliance, the CFO will finally have access to detailed lease data for analytics. A recent article by Accounting today recognizes that, “empowered by the centralized data from the lease accounting software, accounting professionals are positioned to add valuable insights on lease spend, advise on both operational and financial decision and provide more in-depth and accurate financial analysis.” (source)
The new standards could be a chance for finance departments to continue to gain influence and provide strategic guidance to the organization.
If time is not on your side with the upcoming ASC 842/ IFRS 16 compliance date, we offer some ideas to help you get to the finish line.
IFRS 16 Accounting & ASC 842 Accounting