FINANCIAL WATCH By Gary Anderson, Barbara Galaini, Ann Gill and Scott Thacker Considerations for the Implementation of the New Lease-Accounting Standard: Internal Preparation for Lessors Part One of a Three-Part Series T HE NEW LEASE-ACCOUNTING STANDARD is expected to be issued by the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) in early 2016. The changes may result in significant costs (some obvious and some subtle) to lessors and lessees: To mitigate the impact, planning should commence now. In 2016, Equip-ment Leasing & Finance magazine will feature a series of articles on some of the expected challenges and impacts and will discuss early planning steps that may reduce implementation costs. Part I of the series focuses on lessors’ internal considerations (operations, staffing, accounting policies, education, under-writing and evidence to support key estimates in inputs). Parts II and III of the series will expand the discussion to identify factors to consider for accounting and servicing systems and customer (lessee) new requirements and needs, respectively. Please note: The effective date of the standard is expected to be the reporting period following December 15, 2018, for U.S. public companies. Prior year comparative data are re-quired: balance sheet year-end 2018 and income statements full year 2017 and 2018. For U.S. companies expected transitional relief can be elected. Lessors will be able to elect certain practical expedi-ents that would avoid applying certain new rules to existing leases and continue to use ASC 840 through the transition accounting during the transition period, without retrospec-tive application. 2015 2016 2017 2018 Y/E > 12/15/18 An Entitywide Concerted Effort The accounting rule changes will affect almost every depart-ment in an equipment leasing company, from briefing the Board of Directors on the expected changes to the business and the cost of compliance, to modifications of employees’ current jobs. The pervasive impacts will be a project for every lessor, similar to projects convened to address other significant systemic changes. The easiest way to begin the project is to follow established corporate protocol for major changes. For most lessors that will mean appointing a project leader as the single point of reference. The project leader may be the Con-troller, Accounting Manager or Accounting Policy Manager, depending upon the size of the organization. Once a cohesive approach is determined, spawn projects may offspring. Whether your business includes multiple do-mestic divisions or global subsidiaries or is a regional-based business, the impact will affect other departments besides accounting. Reporting Under Old GAAP Rules Phase 1 Planning Phase 2 Conversion Phase 3 Implementation Reporting Under New GAAP Rules Direct and Indirect Impacts The chart on the next page depicts some of the costs that a lessor may face. Accounting Policy: Implementation and Application The new standard deliberations have provoked more interest by auditors, standards setters and regulators than in the past. Many recent standards have explicitly scoped out leases (such as the fair value guidance) until the new leasing standard is fi-nalized. Consistent application of policies and procedures has not been fully vetted to consider the full evidence required to support significant estimates and judgments (such as multiple lease elements and the application of lease accounting to an arrangement that is classified as an operating lease). Because the new standard is more principles based, and although bright-line calculations will serve as guidance rather than absolutely governing its application, accounting policies and application consistency will be required to sup-Implementation best practice includes project management, communication and knowledge transfer throughout the project Phases tend to overlap each other and do not align specifically to time. During this phase lessors should assess the overall impact of the project and develop an implementation strategy This is the heavy work phase of the conversion and includes evaluation of the impact of new GAAP differences to old, developing new policy and socializing, revising contracts & marketing materials, determining accounting & servicing system changes and executing on those changes, modify work streams and processes, train staff, etc. The final phase incorporates all these changes into day-to-day operating activities and can be considered the "go live" Phase 1 Phase 2 Phase 3 48 JANUARY/FEBRUARY 2016 EQUIPMENT LEASING & FINANCE MAGAZINE