How to Approach Staff Accounting Bulletin No. 74 (SAB 74)
Companies are currently in various stages of preparation to adopt the FASB guidance, with very few deciding to early adopt. The new Staff Accounting Bulletin No. 74 (SAB 74) requirement applies to the vast majority of companies that have not achieved early compliance. Before the FASB standard is adopted, SAB 74 requires companies to disclose/discuss the projected impact of the new FASB accounting standards in notes to the financial statements. Therefore, the big question many are facing today is: How should the impact of the new lease accounting standards be reflected in upcoming annual and interim filings with the SEC?
Industry experts recommend including both qualitative and quantitative descriptions to comply with SAB 74. Many companies have included qualitative descriptions regarding the change for fiscal years ending from late 2015 to early 2017. The wording below is an example:
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This new standard increases transparency and comparability by recognizing a lessee’s rights and obligations resulting from leases by recording them on the balance sheet as Right of Use (ROU) Assets and Lease Liabilities. Leases will be classified as either finance or operating, which will impact the pattern of expense recognition on the income statement. This ASU is effective for us beginning in the first quarter of 2019. A modified retrospective transition approach is required for leases existing at or entered into after the beginning of the earliest comparative period presented. Though we are currently evaluating the impact, we expect the new standard to have a material impact on our consolidated financial statements, particularly the balance sheet impact associated with ROU assets and lease liabilities on operating leases.
As the deadline draws near, registrants may also need to include more robust quantitative disclosures. One option to consider is including projected ROU asset and lease liability balances. Other disclosures may involve discoveries related to the new standard that impact business decisions such as restructuring debt covenants or reevaluating lease versus buy decisions.
The calculations required for the quantitative approach can be easily produced with the right technology. CoStar Real Estate Manager’s CPA-tested lease accounting software is already being utilized to help clients meet the challenges presented by lease accounting compliance, including the disclosure reporting functionality designed to meet the requirements of SAB 74.