There will be much change in lease accounting from 2019. From 1 January 2019, the Financial Accounting Standards Board (FASB) and the International Accounting Standard Board (IASB) will implement new standards, ASC 842 and IFRS 16 respectively. In my previous blog, I explained the concept of lease accounting and the precise changes that will soon occur. In this blog, I elaborate on the impact of the new standards on your business and the opportunities that this offers your organisation.
What impact do the new standards have on operational management?
A great majority of business premises are rented and this number is expected to rise in the years ahead. This means that many premises will appear on balance sheets as debts. However, leases related to assets, such as vehicles and equipment, also entail a substantial debt burden. Research by PwC shows that debts on balance sheets will rise by an average of 22 per cent. There are even organisations that lease so much that the debt will rise by more than 200 per cent if all the leasing contracts are shown on the balance sheet. So the financial impact of the new standards is enormous. Moreover, the transition will involve a great deal of work. That’s because publicly listed companies often comprise multiple divisions or branches, which usually work with a variety of contracts and systems.
An organisation will have to make a new inventory of these contracts. Alongside regular leasing expenditure, various other costs will need to be included, such as any leases that are about to start or end. All this will put considerable pressure on accountants, (real estate) managers and CFOs, as they will have to bring order to their pile of contracts in barely two years. We can hear you thinking: why didn’t they get their affairs in order earlier? This has everything to do with the countless proposed amendments to the new standards that were submitted, with most organisations choosing to wait until the standards were finalised before acting, in order to mitigate against incurring extra or unnecessary work.
What opportunities do the new standards offer?
An organisation’s balance sheet total will grow because of these previously unattributed debts. Thus, a CFO will want to know this financial impact and the alternatives. From 1 January 2019, real estate and assets will often be the largest entry on the balance sheet. Until now, premises might have been a rental contract, signed for ten years, which then disappears into a drawer. It was no more than an operational transaction. There was little awareness of the debt that had been agreed for those ten years.
The new standards mean taking a fresh look at a real estate and asset portfolio and its associated contracts. Property and assets will again attract the attention of the CFO, and real estate managers need to be aware of this. Perhaps the CFO will want to reduce his financial obligation, and this might create a major task for the real estate manager. Both parties will have the opportunity to work together using their specialisms; in simple terms, the real estate manager is good with buildings, and the CFO knows everything about figures. They will have to immerse themselves in each other’s work to understand the overall process and to implement this change properly.
For the CFO, it’s not only the impact on the balance sheet that is important here. A workplace costs an average of ten thousand Euros a year. The CFO and real estate manager can collaborate on new ways of working that might require fewer workplaces and assets. The real estate manager should now be able to substantiate and justify alternatives more accurately, such as flexible ‘pay-per-use’ property solutions; these alternatives reduce both costs and lower the impact on the balance sheet.