Preparing for the Looming Changes in Lease Accounting

A Technological Solution for the Informational Problem

Dennis Chambers, PhD, and James Dooley, and Catherine A. Finger, PhD

Donald Rumsfeld famously stated, “There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know.” Rumsfeld's statement can be applied to our state of knowledge regarding the accounting for operating leases in the future. There is general agreement (that is, a “known known”) that new standards will require lessees to report most of the assets and related liabilities associated with operating leases on the balance sheet—a significant change from current off-balance-sheet reporting. A “known unknown” is the final form of the accounting standard, including the way leases will be classified (e.g., not operating, but what instead?), and the specific patterns of expense recognition for leases newly recognized on the balance sheet. The “unknown unknowns” can apply to lessee companies that do not yet understand the extent of the preparation and data gathering they face in order to be ready by the new standard's effective date (whenever that proves to be).