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Speaker: When Implementing New Lease Standard, Broker-Dealers Must Sweat the Small Stuff

Chris Gaetano
Published Date:
May 11, 2018

By Photos public domain [Public domain], via Wikimedia Commons

When speaking with broker-dealer clients on implementing the Financial Accounting Standards Board's new lease standards, Charles V. Abraham, the financial services practice leader at Mazars USA, said the first question he gets from them is how they can avoid doing it at all. Speaking at the Foundation for Accounting Education's annual Broker-Dealer Conference on May 9, Abraham said that there are very few circumstances in which they could be exempt from the standards.. 

FASB’s new lease standard, approved in 2016 and effective for 2019, places all leases on the balance sheet, with total lease payments on the liability side and the right to use the leased item on the asset side. Abraham said there are only two ways to avoid this standard. One is to determine that a contract is not actually a lease, as in there is no identified asset or there is no control over the asset. This generally does not work because it's a very rare rental contract that does not meet these criteria. The second is to deal only with short-term leases, defined as those under 12 months. But it is tricky for broker-dealers to pull off this exemption because they are generally not vacating their building before the year is up, even if it's a parent company that's actually making the lease. 

"I don't think either factor will get people to say, 'I don't have to follow this.' This is a very long way of saying, 'OK, leases will go on your balance sheet,'" he said. 

Once clients accept that, yes, they will need to follow the new lease standards, the question then becomes how exactly they will do so and what it will involve. Vital to the effort is determining what goes on the balance sheet and how. Abraham said that broker-dealer clients generally tend to think in terms of what he said were big-ticket items, like their office buildings. Yet he warned that people need to think of things in more granular terms. 

For instance, he said firms might think that equipment rentals are immaterial, but they are still not off the hook, as they have to do an analysis to show that the rentals are immaterial. Further, the standard requires that entities separate out lease components from non-lease components, such as maintenance or property taxes. Only lease components are accounted for in accordance with the new standards. Abraham said that this can involve a lot of subjectivity and judgment, but he advised that the general way to tell one from the other is that a lease component is an item or activity that transfers a good or service to the lessee. Entities doing this need to evaluate the total amount they are paying and come up with a consistent allocation methodology to separate the lease and non-lease components. 

Beyond all this, there is the challenge of categorizing leases, too. All leases in the new standard can be divided between operating leases and financing leases. While there is no real bright line between the two, Abraham said that, in general, a financing lease involves control over the asset itself (generally where the risk and reward is borne by the lessee) and an operating lease  concerns control over the use of the asset (generally where the risk and reward is borne by the lessor).  

Overall, implementing this standard requires pulling a lot of information together, which he said broker-dealer clients have found challenging so far. 

"It's gathering the pieces of data, the people, to do the analysis. That has taken people some time. ... Start early, start speaking with clients early, and if you're the broker-dealer, talk to your auditor, your [financial and operations principal], et cetera," he said. 

The conference session also featured David Grumer, a partner at Citrin Cooperman, who moderated the panel, which was an accounting update for broker-dealers. He noted that when the Tax Cuts and Jobs Act passed in December, the timing concerned many entities that needed to figure out the new law's impact for their financial statements, which were due in mere months. 

"It's a queasy kind of feeling to have, looking ahead to the next year. If we find we need to make a correction, we need to figure out how to tell our readers about this, how to explain it to our auditors. Things get pretty messy," he said. 

In response to these worries, the SEC released Staff Accounting Bulletin 118. It allows entities to use a reasonable estimate to come up with a provisional amount when they don't have the necessary information available, prepared or analyzed to actually do the required accounting. Grumer said that entities that use this estimate method need to make a number of disclosures though, including which items are recorded provisionally, the current existing or deferred tax amounts, and why they still need more time. 

He also warned that the ability to use provisional numbers is, itself, provisional. 

"The disclosure is not intended to be indefinite. You get about a year to study and conclude what kind of accounting, or what would be the accounting, for the new tax act," he said. 

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