Companies are continuing to feel the brunt of the new lease accounting standards this year, with the average company experiencing lease liability increases of 419%, according to the 2021 Lease Liabilities Index Report from accounting technology provider LeaseQuery.

Based on an expanded analysis of balance sheets from more than 950 companies pre- and post-transition to ASC 842, the report cautions private companies — many of whom are behind schedule in their transition to the new standard despite warnings from public companies and other early adopters — that they may be surprised by how much they’ll have to overhaul their financial snapshot.

“A once-in-a-generation accounting change is meeting up with a once-in-a-generation market change,” Sarah O’Sullivan, accounting director for LeaseQuery, said. “Even before the unexpected challenge of COVID-19, early adopters shared experiences with longer-than-expected time commitments and lingering complexities. If last year’s report acted as a wake-up call for companies to expedite their journey toward compliance, this year’s update underscores the preparation urgency and reminds finance professionals there is no time left to delay.”

Other findings from the report analyzed the unique intersection where balance sheet liability changes coincided with COVID-19 impacts, including resets to business strategy, long-term changes to customer behavior and shifting employee expectations. The “Tested 10” industries included banking and financial institutions — which experienced a 130x increase in average lease liability — and higher education, where institutions’ experienced a 74x increase in average lease liability. Restaurants (+41x) and retail (+13x), which made headlines throughout 2020 for closures and limited capacity, also are contending with significant balance sheet impact.

Private vs. Public – Diverse Perception, Pacing and Priorities

• Although many public companies filed their second annual reports during a comparatively calmer period, it’s not to say they had an easy time of it. The average post-transition liabilities for public companies increased $180 million — from $59 million to $239 million — year over year.
• Among private companies in compliance, average liabilities increased from $8.6 million to $116 million, a stark change in an already complex financial year. The surrounding confusion around multiple filing deadline extensions paired with COVID-19 impacts on consumer behavior, investor sentiment and the global economy have all contributed to wide variations in where private companies are in their transition progress.

Lease Strategies Guided by Future-Proofing, Changes in Consumer Behavior

• Consumer behavior shifts will have an outsized effect on companies’ lease strategies going forward. Topline trends are clear in customer-service heavy industries like retail, with 54% of such companies asking for rent concessions due to the pandemic while experiencing rightsizing due to the acceleration of e-commerce and convenience models like curbside pickup. Consumer behavior shifts are also evident across the banking industry, where the need for new leased equipment like ATMs and drive-up teller systems may add new leases to balance sheets.
• Creative lease design can help the hardest hit industries recover.Restaurants have experienced, on average, a 41x increase in lease liability and more than 100,000 closures across the United States. However, creative solutions like ghost kitchens and new delivery service options paint a picture of what’s to come. The healthcare industry is also facing a change in service delivery with the rise of telehealth and an increased focus on in-home and community care, potentially decreasing the amount of leased office space while increasing the need for costly equipment for quality telehealth experiences and concierge-level in-home care. As the industry faces a liquidity crisis, getting compliant could help hospitals and healthcare organizations find cost savings or better reassess their leasing and real estate needs moving forward.

Benefits of Lease Accounting Transition

• Company operators can benefit from a better understanding of their overhauled balance sheets. Increased visibility over lease portfolios can help lessees during the renegotiation process. Additionally, between the lease accounting rule change and updated COVID-19 protocols, it can prompt and inform reconsideration of future lease vs. buy decisions.
• Lease centralization is going to require increased transparency and balance sheet scrutiny. One of the overarching goals of issuing ASC 842 was to increase transparency for all lease transactions throughout a business. Looking to the future, lease centralization and visibility will become even more essential, especially for industries like higher education, where institutions commonly carry decentralized leases across multiple departments and separate schools, and professional services, where a continuation of remote work is expected to complement leasing of workplace category extremes such as campus-style offices or WeWork-esque rentals.

“Each day that organizations delay their transition journey leaves valuable business insight and even hard cash on the table,” George Azih, CEO of LeaseQuery, said. “In a challenging economic time, it’s even more critical to push ahead so that finance and company leaders can benefit from more visibility over leases as they make critical lease vs. buy — and physical vs. digital — decisions in the year ahead.”