Much Work Remains for Lease Standard’s Implementation
As the 2019 effective date of FASB’s new lease accounting standard looms, many public companies are behind where they should be in the implementation process, according to two surveys of financial reporting professionals. The new guidance is not considered to be especially complex in terms of recognition or measurement. The standard requires companies to record on their balance sheets assets and liabilities for the rights and obligations of renting real estate, equipment, and vehicles. Leasing affects many parts of an organization because it is such a pervasive business practice. Most companies keep close watch on big-ticket rentals such as real estate, but equipment leases may be more difficult to track down and enter into an accounting system. Rental agreements may be stashed in file drawers or they may not even say “lease” across the top of the contract, so the initial data gathering may be a daunting task. FASB published the lease accounting standard after a decade of debate and a failed effort to converge U.S. GAAP’s lease accounting rules with international standards. The new standard is a response to years of complaints—and attention from the SEC—about companies taking advantage of U.S. GAAP to keep debts off their balance sheets.
Poor Planning for Risk Management
An AICPA survey found that only 31% of organizations have established processes for enterprise risk management. Larger organizations, public companies, and financial services organizations have tended to adopt risk management practices more quickly than smaller entities, the AICPA found. Only 22% of finance officers described their organizations’ supervision of risk management as mature or robust. Still, the survey found some improvement over the eight years in which the AICPA and North Carolina State University’s Enterprise Risk Management (ERM) Initiative have conducted the survey. The 31% figure represents a 22-point improvement from the 9% of respondents in the inaugural 2009 survey who reported that their organizations had risk management processes in place. “Senior executives and boards of directors are realizing increasingly that the speed of change and the level of uncertainty in the global business environment is outpacing the ability of their organization’s traditional approach to managing risks,” said Mark Beasley, director of NC State’s ERM Initiative.
Progress Continues on Rate-Regulated Industries Model
The IASB has taken another significant step forward in drawing up a new accounting standard for rate-regulated industries—such as utilities and public transportation services—that reflects the effect of regulation on entities’ financial condition. The board agreed on the parameters around what constitutes a “regulatory agreement” that would be subject to the new accounting. Board members said they had to fine-tune the wording, but they largely agreed that rate regulation is established through a formal regulatory framework that is binding on both the business and the regulator and establishes a basis for setting the rate. Board members also agreed that regulatory assets and liabilities must be recognized if it is “more likely than not” that they exist. After much debate, the board agreed that it would not include a threshold to determine when recognition should not be required. “We’re saying that it’s sufficiently infrequent that we don’t think it raises questions,” IASB member Mary Tokar said.