FASB Cloud

New Lease Accounting Standards May Have a $700 Billion Impact to Fortune 500 Companies

The new lease accounting standards issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) represent some of the most significant changes in accounting history.

For the first time ever, companies will be required to recognize practically all lease obligations as assets and liabilities on their balance sheets. U.S. Securities and Exchange Commission data shows that the Fortune 500 companies have more than $700 billion in off-balance sheet lease obligations, and the IASB projects that new additions to balance sheets for all companies worldwide may be in excess of $3 trillion. CoStar Real Estate Manager estimates that real estate leases may account for up to 80 percent of the total value of many companies’ lease obligations.

The biggest problem for most organizations with large portfolios of operating leases is that they do not have ready access to the lease information they will need for reporting in one database, or even in electronic form. Updating the people, processes and technology used to manage leases by the effective date will be a significant challenge.

The technology needed for compliance must provide a comprehensive calculation engine, journal entry approvals, integration to third party systems and audit trails for internal and external auditors. To ensure compliance with Sarbanes Oxley’s requirement to demonstrate effective internal controls and procedures for financial reporting, any technology platform should complete an SSAE 16 audit annually.

The new lease accounting standards apply to all types of leases including real estate, IT equipment, fleets of automobiles, manufacturing equipment, office equipment, forklifts and more. Ideally, organizations will procure a technology platform that supports every type of lease and may be used as a single system of record for all transaction, restatement, accounting and reporting requirements of the new standards.