Lease Accounting has been a pretty active buzzword lately thanks to the new leasing accounting FASB standards released earlier this year.
The corporate world has started the necessary changes in their leasing contracts and accounting practices to adhere to these new norms which will become applicable starting in 2019. It might sound safely distant in the future, but companies will be required to provide three years of income statements and two years of balance sheet comparable.
To be compliant in time, it is crucial for you to get your plan in place and work towards fulfilling the requirements as laid down in the new standards.
With companies reporting early estimates that it may take months for the lease location process, it’s understandable how the thought of starting your readiness plan can be overwhelming. To help ease the pain, our lease accounting FASB experts have put together 5 tips to help tackle the daunting task ahead of you.
#1. Account for your assets
This might seem like an obvious one, but the new leasing standard now requires all of your leases over 12 months in length to be accounted for on the balance sheet as assets and liabilities, not just financial leases. Naturally, with these hitherto off-balance sheet items moving on to the balance sheet, their amortization expenses need to be accounted for in the financial statements.
FASB new lease accounting standards requires the lessee to recognize a right-of-use asset as well as a lease obligation for the present value of the payments to be paid over the course of the lease. Which means that depreciation on these lease assets will have to be recognized separately from the interest on lease liabilities. This is turn, is bound to have a substantial impact on the Balance Sheet as well as quite a few financial ratios including Debt Equity and coverage ratios.
(See the lease comparison model above to help classify your leases.)
Not only do you need to start making a list of all your real estate and equipment leases, you must also capture essential data including, but not limited to, lease commencement and expiration dates, option notification dates and terms, rent and income escalations, security deposit and tenant allowance information, additional rent contingencies, tenant improvements and so on.
#2. Form a team
Once your lease inventory is finalized, the next step is to assemble a team of cross-functional experts, (such as Accounting, Treasury, IT and Real Estate) to analyze your existing business processes with respect to their FASB’s new lease accounting standards readiness. Forming a cross-functional team is incredibly important since implementation of the standards involves various stakeholders.
It will be as much an accounting issue as it will be a real estate one!
The departments will need to work together as a team to formulate a plan for the transition, understand business practice around renewal and purchase options, as well as prepare for financial restatements. A strategic and effective adoption of the new leasing rules is more of a compliance exercise and will need a buy-in of your key executives. If you get the right team together, you’ll find transitioning to the new standards seamless with minimal business impact.
#3. Understand your current lease portfolio
A strategic evaluation of your lease inventory is pertinent for you to understand how each of the lease assets will be accounted for under the new rules. Remember, you will need to get data ready for both real estate and non-real estate leases. You will need to identify where you have systems, resources, data and process gaps in your portfolio with respect to the new financial reporting requirements. An assessment of data readiness should include the creation of a comprehensive inventory, ensuring your data is reliable and making sure data is accessible to those that need visibility.
#4. Revisit and re-negotiate lease agreements
With more leases getting added on to the balance sheet, even a minor item like a service charge may have a significant impact on your overall financial statement. Make a habit of looking out for these seemingly trivial (yet vital) elements in the leasing contracts and attempt to re-negotiate the terms. You can, for example, ensure that there is a clear delineation of service charges like maintenance and taxes in the new leasing agreement. Since these expenses don’t need to be shown in the balance sheet, they need not be rolled into the lease. In turn, you can reduce the actual cost of lease that needs to be shown in the balance sheet translating into a relatively healthier looking financial statement.
#5. Make Compliance a priority
Creation and implementation of a roadmap is the final and most important step you will need to take in order to achieve FASB lease accounting changes. It calls not only for changes in certain business processes but also upgrades to the organization’s IT infrastructure, especially in the areas of accounting, real estate and asset management systems. Other areas of business you might see getting affected are tax policies, training programs and related operating processes.
This is where applications like IBM TRIRIGA, an integrated workplace management system, can help achieve your objectives. Our team uses the solution to help clients evaluate the balance sheet and P&L account for lease versus buy decisions. The software helps identify under-performing and/or under-utilized facilities, assets, processes and resources, and can even assist you in analyzing asset conditions, assessing ROI on new facilities and ultimately prioritizing your investment decisions.
Needless to say, large companies have found these technologies invaluable when identifying areas where significant cost savings can be realized, which will help them (and you) reach FASB’s lease accounting compliance goals. Get prepared, watch our webinar on “TRIRIGA FASB Lease Accounting Compliance“.
Now armed with tips to achieve the new FASB lease accounting standards, it’s time to set the budget. Our next blog post on “Finding Budget for FASB New Lease Accounting Standards” can help.
Are you ready to face new lease accounting standards impact with full force?
Our team at JLL can help you in the planning and implementing of your FASB lease accounting compliance goals. For more information on how you can get a FastStart to meeting lease accounting challenges of FASB,
The JLL Team