This next accounting rule change will add liabilities to every balance sheet

A big change in lease accounting due in January of 2019 will affect every public and private company in the U.S., just like the tax revamp and the new rules for recording revenue that took effect for most public companies in January.

The new rules require companies to record liabilities for operating leases on their balance sheet for the first time ever. As the deadline draws closer, public companies are required to include a discussion of the potential future impact of the new rule on their financial statements.

See also: How tax and accounting changes obscured a strong quarter for earnings

But many companies appear unprepared for the change, according to Michael Keeler, chief executive of LeaseAccelerator Inc., a provider of software-as-a-service, or SaaS, for enterprise lease accounting.

Keeler told MarketWatch that most companies started their revenue-recognition efforts late and are using the same resources for lease accounting changes: “So they could not get started earlier on lease accounting.”

Only 13% of companies surveyed at the end of March told LeaseAccelerator that a project team had already been created to work on implementing the new rules.

“We’re in the tornado now,” said Keeler. “Maybe 25% of companies have gotten started or even made a decision on what system they will use to make the change. The lack of implementation progress suggests there is still a long road to compliance for many large lessees, since each will have to implement new lease accounting systems, policies and controls.”

Under the new rule, companies leasing assets, or lessees, will have to recognize a “right-of-use” asset and a lease liability for virtually all of their leases. The new standard retains the current dual approach on the income statement, requiring leases to be classified as either operating or financing. The accounting on the lessor side is similar to the current approach.

The U.S. accounting standards setter, the Financial Accounting Standards Board (FASB), and its international counterpart, the IASB, started working on the rule change in 2006 as part of a global effort to align their two sets of standards and address concerns about the current approach.

“Maybe 25% of companies have gotten started or even made a decision on what system they will use to make the change. The lack of implementation progress suggests there is still a long road to compliance for many large lessees, since each will have to implement new lease accounting systems, policies and controls.”

However, the two were unable to agree, and eventually both issued separate lease accounting standards that diverge in significant areas. In particular, from an income statement perspective, the international model treats all leases as a financing arrangement.

LeaseAccelerator compiled a report of the lease accounting disclosures of the top 100 U.S. public companies as ranked by the total leasing obligations itemized in their financial statement footnotes.

The table shows the top 10 companies in their report:

Source: Data provided by LeaseAccelerator based on SEC filings.

LeaseAccelerator found that 76% of the companies reported that there will be a material impact resulting from the transfer of most “right-of-use” assets and liabilities from footnotes onto the balance sheet. However, only 8% of companies included quantitative estimates of the material impact to the balance sheet in their survey responses. Those estimates ranged from $1.2 billion to $13 billion. Only 28% could say at this point that there will be no material impact to their income statement.

In filings with the Securities and Exchange Commission for the quarter ended Dec 31, 2017, JPMorgan Chase Inc.












JPM, -0.38%










 said that the balance sheet impact would be $10 billion, Capital One Financial Corp.












COF, -4.78%










 said it would be 2.7 billion and Apple Inc.












AAPL, +0.44%










 put the number at $9.6 billion, according to data compiled by research firm Audit Analytics.

In all of these cases, the addition of the liabilities would have a material impact on the financial statements of these companies beginning in January 2019.

Goldman Sachs Group Inc.












GS, -1.34%










and Bank of America Corp.












BAC, -0.17%










were the only two companies in the LeaseAccelerator top 100 that said the impact to the balance sheet would not be material.

Read: New accounting rule raises revenue for big banks, but not all are highlighting the change

See also: A revenue rule change is coming and every company will be affected

Similar to the recent change in rules regarding revenue recognition where a handful of companies adopted the new rules early, four companies so far have said their balance sheets already reflect the changes.

Microsoft Corp.












MSFT, -0.87%










which was an early adopter of revenue recognition, said in its second quarter 10Q as of December 31, 2017, it had elected to adopt the new lease standard as of July 1, 2017 at the same time as the revenue-recognition changes. Microsoft added $5.372 billion in operating lease liabilities and $1.183 billion of other current and long-term liabilities to its balance sheet with the lease accounting change. Adoption of the new standard required Microsoft to revise previously reported results but did not have an impact on its income statement.

Read also: Microsoft earnings: Massive changes are ahead from job cuts to accounting change

See also: Microsoft joins Facebook and Alphabet in move to GAAP reporting

Target Corp.












TGT, +0.86%










Ensco PLC












ESV, -2.27%










and Transocean Ltd.












RIG, +0.80%










have also early adopted the new lease standard, according to an analysis of disclosures obtained by MarketWatch from research firm Audit Analytics. Noble Corp had earlier anticipated early adopting but changed it expected adoption date and now says it will meet the Jan 2019 deadline instead.

Companies face the tedious and time-consuming task of inventorying lease contracts so the details and costs can be tallied via software and then added to the balance sheet. Unlike revenue recognition, there is only one approach to the transition, the “modified retrospective approach” which puts the leases on the balance sheet but does not require the retroactive restatement of prior period results.