New leasing standard another regulatory punch for telecommunications
While the new leasing standard changes brought about by ASC 842/IFRS 16 will affect multiple industries, the telecommunications industry is one that will be significantly impacted. Telcos are already reeling from the efforts related to implementing the new revenue recognition standard (ASC 606/IFRS 15) so this is a second hit in a one-two regulatory punch.
There are a few reasons telecommunications organizations are heavily impacted by the change to the leasing standard:
Lease volumes are high and the contracts are complex
Today’s telco organizations have a high volume of operational leases on their books. These cover everything from the leasing of cell sites, dedicated lines, retail locations and data centers. Previous research of the world’s 50 largest telecom operators suggests as much as $125 billion in right-of-use assets will be added to the balance sheets. (source) These lease volumes will make standard adoption a data-heavy task. Firms will need to consider whether their databases are robust enough to facilitate analysis by the finance team.
And it’s not just the volumes which post challenges. These types of leases can be complex, with multiple data elements, logic requirements and components that are paid for by varying groups and need to be accounted for in different ways. Companies will need to identify and separate lease and non-lease elements and decide how they should be treated under the standard.
Data is spread throughout multiple sources or held off-line
As mentioned, data volumes will pose adoption challenges but the way lease data is currently stored is perhaps the more daunting aspect. Most large telecoms currently have multiple systems and sources of information with inconsistencies or disconnections between finance and asset management systems. Certain data may also be held off-line in spreadsheets. In fact, in a recent survey, PWC found that 68% of companies surveyed used spreadsheets as their primary system for tracking leases (source).
With the new standard requiring the capture of more data, spreadsheet based analysis / management of large portfolios of leases will now be unmanageable, inefficient and fail to offer the controls necessary to comply with the standard effectively.
Leases are modified regularly
Leases in this industry tend to be frequently modified due to changes in the technology, long durations with interim options to renegotiate terms and M&A activity in the industry. Systems are not set-up to handle large volume amendments.
Existing lease management solutions are not ready or have limitations in their accounting functionality while spreadsheet-based approaches can’t keep up with the complexity.
The long road ahead
According to a recent Deloitte poll, only 9.8% of more than 5,400 financial and accounting professionals from multiple industries say their companies are prepared to comply with the new FASB & IASB lease accounting standards and only 15% believe compliance will be easy. (source)
Given the additional burden of ASC 606 / IFRS 15 compliance for the telecommunications industry, the leasing standard is likely to stretch an already busy group.
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