CHAPTER 2: IMPLEMENTATION TIMELINE
The new lease standard is effective for fiscal years starting after December 15, 2018 for public entities and after December 15, 2019 for all other organizations. [Update as of July 17, 2019: the FASB Board indicates that it's likely to delay the effective date for all other organizations by one year, which would make the new effective date the fiscal year starting after December 15, 2020. We will closely monitor their final decision, expected by September 2019.]
Once you know your effective date, you can determine your Initial Application Date, which is an important date that we describe in more detail at the end of this piece, along with definitions of other key dates for the new lease standard.
How do you implement the new lease standard? For a checklist of key steps in the implementation process, download “Are You Ready for the New Lease Accounting Standard?”
Many companies find that identifying and analyzing their leases requires more resources and expertise than they have available. Don’t underestimate the requirements for this initial step. In fact, you may want to consider engaging outside advisors from the start to avoid errors and higher costs after implementation.
When you are ready to implement the new lease standard, you need to determine when to start each step and what resources are required. To help you with your planning efforts, we have prepared a matrix with related timelines so you know when you need to begin your implementation efforts to leave sufficient time for completion before your Initial Application Date.
In our new lease standard implementation matrix, we have created the following groupings by number of leases in the portfolio:
Small: 1 – 100 leases
Medium: 100 – 2000 leases
Large: Over 2000 leases
Download the full New Lease Standard guide today!
By using this chart, you can estimate how many months you may need for each of the major implementation categories based on your lease population. You can create a timeline of key dates for the new lease standard tailored to your company that will help you to plan and monitor your progress.
[Update as of July 17, 2019: While we will alter these suggested implementation start dates when we have a definitive effective date from the FASB, we expect a one-year delay and therefore expect to be shifting these implementation start dates to one year later.]
For purposes of this matrix, we treated all types of leases the same, using a common guideline that each lease will take about three hours to analyze (for more information on the time it will take to analyze leases, see page 37 of this KPMG Presentation). For your planning, consider the complexity of your contracts as well as how many people can dedicate their time to reviewing your leases. If you have 50 reasonably straightforward leases, it might take one person less than a month’s dedicated time to analyze them. However, if there are 40 straightforward leases and 10 complicated ones, you might need to extend your preparation time by a month or more to allow for the proper conversations and decisions to occur.
Also, your project team’s familiarity with the new lease standard can impact the time that this will take. Companies should expect more time to review leases initially because the team is adjusting to new definitions, processes, systems, and decision considerations.
You will notice that we have overlapped the timing of most implementation stages. Depending on your resources, your timeline may be linear - starting at a point in time and adding all the numbers of months in the steps sequentially. As a result, your overall timeline could be longer.
Using the outcome of this simple analysis, you will have a better indication of how many months before your IAD you must get started to be ready in time. If you find that you do not have sufficient time with your existing planned resources, you may need to involve additional internal resources and/or hire consultants to help you. Many organizations are already planning to outsource components of the new lease standard implementation and it may be the only way to meet your deadlines.
Key Dates in the New Lease Standard
The Effective Date is the end of the fiscal year for which you elect to adopt the new lease standard. For example, if you decide to adopt the new lease standard early for your fiscal year ending in 2018 and your fiscal year end is September 30, then your Effective Date is September 30, 2018.
If you decide to wait until adoption is required, then you will fall under one of two key dates:
- Fiscal years beginning after December 15, 2018 for:
- All organizations following IFRS
- Public business entities
- Not-for-profits with conduit bonds that are openly traded
- Employee benefit plans that file financial statements with the SEC.
- If this applies to your organization and your fiscal year end is December 31, then your Effective Date is December 31, 2019.
- For all other organizations, your Effective Date is your fiscal year beginning after December 15, 2019. For example, if you are a privately held company with a fiscal year end of March 31, your Effective Date would be March 31, 2021. [Update as of July 17, 2019: the FASB Board indicates that it's likely to delay the effective date for all other organizations by one year, which would make the new effective date the fiscal year starting after December 15, 2020. We will closely monitor their final decision, expected by September 2019.]
Initial Application Date
Now that you know your Effective Date, you can determine your Initial Application Date. Following the original guidance, this would be the first day of the first fiscal year represented in your financial statements.
For example, if your Effective Date is December 31, 2019 and you have three comparative years in your financial reports, your Initial Application Date is January 1, 2017.
If your Effective Date is March 31, 2021 and you have two comparative years in your financial reports, your Initial Application Date is April 1, 2019.
It is important to note that the FASB recognized that the above guidance requires restating prior years and therefore is a significant amount of work. Therefore, they issued ASU 2018-11 in July 2018, which allows companies to avoid prior-year restatement. Most organizations do elect this new practical expedient. For more information about this, please see our blog post: "FASB Amends the New Lease Standard."
- Using the above example, if your Effective Date is December 31, 2019, you have three comparative years in your financial reports, and you elect the new transition option, your Initial Application Date is January 1, 2019.
- If your Effective Date is March 31, 2021 and you have two comparative years in your financial reports, and you elect the new transition option, your Initial Application Date is April 1, 2020.
Why do you care about the Initial Application Date? Because the time between your Initial Application Date and the Effective Date is called the Transition Period. During this time, you don’t quite follow the old standards nor do you completely move to the new standards.
While this is fairly complicated to figure out, the good news is that there are practical expedients available to simplify the work required during the transition period, particularly around whether or not the lessee needs to reassess expired or existing leases, as well as the ability to use hindsight on renewal and purchase options.
Important Dates for Individual Leases
An important date for individual leases is the Commencement Date, which is the date the underlying asset is available for use by the lessee. It’s important to note that this may not be the date when the lessee enters into the agreement with a lessor. Lease classification and measurement should take place at the commencement date.
Modification Effective Date
Sometimes leases are renegotiated. If this results in a new contract, renewal, or other extension not previously anticipated, it is treated as a new lease. Otherwise, assumptions such as the discount rate, fair value, and remaining economic life of the underlying asset are reviewed and updated as of the Modification Effective Date, with modification gains and losses also recognized as of the same date.
Other times, a triggering event occurs that was not otherwise anticipated. Generally, this is something that requires the lessee to reassess the lease term. The date as of which this triggering event occurs is called the Remeasurement Date. Note that the lessee should also update the discount rate and any variable lease payments as of the Remeasurement Date.