FALL 2018 TODAY’S GENER AL COUNSEL
YOU SHOULD WORRY ABOUT EMBEDDED LEASES By Mathew Keshav Lewis
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018 is a hallmark year for regulatory change. The General Data Protection Regulation (GDPR) has already gone into effect, setting a new standard for consumer data collection, storage and usage. Despite a GDPR deadline that has come and gone, the enormity of the undertaking means that most companies still have contracts in need of remediation as they confront the fact of compliance. But while legal departments continue to focus on the world’s most sweeping privacy law, they must also be prepared for sweeping change in the world of leasing. Virtually all large organizations use leasing agreements to obtain access to assets, yet few are prepared for the $2 trillion of lease obligations that are set to hit corporate balance sheets in December 2018 for United States companies, and January 2019 for international companies. The new lease accounting standards (FASB ASC 842 and IFRS 16) introduce rules not only as to how companies identify and measure the value of leases but how they report them on corporate balance sheets. The impending regulation is far-reaching. It applies to all leases — from real estate to office equipment and data centers — and has the potential to significantly impact the way companies do business. The task ahead is large and complex, involving numerous functions within the company, legal being among the most critical. Although companies must already disclose their lease obligations, it is currently done in the footnotes to their financial statements. Leases aren’t included in the balance sheet numbers to which investors pay the most attention. With the introduction of IFRS 16 and FASB ASC 842, nearly all off-balance sheet accounting for lessees will be eliminated. Companies will need to account for the present value of all lease liabilities on the balance sheet as debt, while also being able to account for a right-of-use asset. Rather than lease charges being accounted for as operating income in