Implementation of the new lease accounting standard has led to average balance sheet lease liability increases of 1,475 percent, according to new research from lease accounting technology provider, LeaseQuery.
In an analysis of more than 400 balance sheets pre- and post-transition to ASC 842, LeaseQuery’s new Lease Liabilities Index report indicates that companies that have not yet transitioned to the new standards need to prepare for an overhaul of their financial snapshot.
Spotlighting the lease accounting transition impact across six critical industries, the research also found that:
The rule change arrives at the same time as many industries are contending with other significant headwinds. For the retail industry, in particular, bankruptcies and changing consumer preferences are further challenging the margins. With a 1,012 percent increase in average lease liability, retailers need to spend 2020 optimizing their leasing and location strategy while also paying attention to growing digital demands.
Organizations should look at lease accounting not as another compliance burden, but as an opportunity for further efficiency and streamlined processes. As technology changes the type of equipment used in key processes, industries like manufacturing and energy are finding themselves in the midst of transformation. For manufacturers, thorough insight into their lease liability increase (495 percent) can prompt businesses to ensure contracts are optimized and leases are managed effectively. As businesses in the energy industry alter their long-term strategy for a greener world, lease arrangements are likely to be in focus.
Lease accounting is making a huge impact on how leasing decisions appear on the balance sheet. Lease accounting has fundamentally changed the financial snapshot of financial institutions that are now recognizing operating leases as both a liability and a corresponding asset. Banks are averaging a significant increase in lease liability (6,070 percent).
With numerous leases moving to the balance sheet, lease versus buy decisions will weigh heavily. For the restaurant industry, the addition of equipment and other leases to the balance sheet has already increased its average lease liability by 1,743%. Determining whether to lease or buy equipment moving forward will be a critical topic of discussion among key stakeholders.
“The FASB’s issuance of ASC 842, the new lease accounting standards, was initially put in place to increase transparency for all lease transactions throughout the business,” says Jennifer Booth, VP of Accounting at LeaseQuery. “With operating leases now requiring recognition of asset and corresponding lease liability, the level of balance sheet change ahead should be a wake-up call for businesses to expedite the journey towards transition and begin immediately.”
For more information, read the full report: Lease Liabilities Index: An Analysis of More Than 400 Companies’ Balance Sheets Pre- and Post-Transition.