There will be considerable change in lease accounting from 2019. That date will see new standards from the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) come into force. This also means that the roles of real estate and finance manager is also likely to change, as each will undoubtedly need the other to cope with the challenges of the new standards.
Up until the 1970s, it was usual for organisations to own virtually all their own property, everything from real estate to trucks. As this meant that a relatively large amount of money had to be spent on such equipment, there was less money available to actually run the business. This gave rise to a new trend: leasing. Not only did organisations no longer have to save up for major purchases, it also meant that business resources which were now rented, were no longer shown as debts on the balance sheet. What is more, it also meant that the figures looked somewhat better on paper. The new lease accounting standards will put an end to all this. To open the way to financial transparency, publicly listed companies must disclose all their leasing contracts on their balance sheets from 1 January 2019.
New tasks for the new standards
This will change a finance manager’s work. Leasing contracts, which previously might have been considered less important, will now play a larger role. That is because it’s no longer simply about what an organisation pays to a leasing company each month. The finance manager now has to incorporate on the balance sheet both the valuation of the liability and of the property. That presents quite a challenge. Whereas previously he could simply report on the costs of leasing contracts, now, to be compliant with the new standards, the finance manager must also report the value of these contracts as well as the underlying information.
On the other side of this is the real estate manager and as 2019 looms, he also needs to give much more thought to the financial impact of leasing arrangements. No longer can he just mention the leasing costs of a set of premises, but rather, he must also state the impact of those costs on the profit and loss account and the balance sheet.
Who will resolve the puzzle?
What do both the real estate and finance managers have to do to be ready for the new standards? For the finance manager, it is important to know what precisely he has to report. Of course, he could read through all the leasing contracts, often amounting to dozens of pages, in order to grasp their financial impact. A better approach is to call on the real estate manager, who knows exactly what’s in those contracts. For his part, the real estate manager is likely to be less involved in the impact of the contracts on the balance sheet. In short, however, each holds a part of the puzzle, which they can solve together.
Collaboration is the key to success
In practice, real estate and finance are two separate worlds. Most real estate managers prefer not to immerse themselves in all the accounting rules. Finance, by contrast, has knowledge covering a whole gamut of legislation and regulations, of which real estate is only a small part. Having a ‘linking pin’ would appear to be a way forward - someone who speaks the language of both the real estate and the finance manager. So it could be an interesting idea to hire someone with a completely new profile. Someone who knows about both real estate and finance.
Indeed, if there isn’t a linking pin, the key to success will lie in close collaboration between the real estate and finance. Wasn’t that always the case anyway? Given that substantial capital is tied up in real estate, this has been an important enough reason for both parties to talk to each other at least now and then. However, now the finance manager has extended reporting responsibility, his need for real estate manager is greater - to substantiate all the figures on the balance sheet and to keep them up to date. Without each other’s help, 2019 will become a very tight deadline.