Analyst Reports
A lot will change in lease accounting starting in 2019. From January 1, 2019, the Financial Accounting Standards Board (FASB) and the International Accounting Standard Board (IASB) will have new standards, ASC 842 and IFRS 16 respectively. In my previous blog, I explained the concept of lease accounting and the changes that will occur. In this blog, I will elaborate on the impact of the new standards on your business and the opportunities they offer for your organization.
What impact do the new standards have on operational management?
It has been estimated that the total impact of these changes will result in an additional $2 trillion of operating lease commitments to be reflected as a liability on corporate balance sheets. All leases, including real estate, vehicles and equipment, entail a substantial debt burden.
Research by PwC shows that debts on balance sheets will rise by an average of 22%. There are even organizations that lease so much that the debt rises by more than 200% if all the leasing contracts are shown in the balance sheet. So the financial impact of the new standards is enormous.
And the transition will involve a great deal of work. That’s because companies often have multiple divisions or branches, all with their own contracts and systems for tracking leases.
An organization will have to inventory all these contracts afresh. In addition to the regular leasing expenditure, various other costs will need to be included, such as any starting and ending costs for the lease. This all puts considerable pressure on the responsible accountants, real estate managers and CFOs, as they have to bring order to the 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 for the new standards that have been submitted over the years. Most organizations chose to wait until the standards were announced in 2016, so they wouldn’t have to do any unnecessary work.
What’s the good news? There’s an opportunity here, right?
An organization’s balance-sheet total will grow because of these debts that were not previously attributed. The CFO therefore will want to know the financial impacts and alternatives. Starting on January 1, 2019, real estate and assets will often be the largest entry on the balance sheet. This will significantly increase the importance of the corporate real estate team and the relevance of every rental contract.
The new standards mean a fresh look at the real estate portfolio and the associated contracts. Property will again attract the attention of the CFO, and real estate managers need to be aware of this.
Both parties will also have the opportunity to work together using their specialties; in simple terms, the real estate manager is good with buildings, and the CFO knows everything about the 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 thousands of dollars a year. The CFO and real estate manager can collaborate on new ways of working that would require fewer workplaces. The real estate manager should now be able to better advocate for co-working and other flexible work options, because these alternatives both reduce the costs and lower the impact on the balance sheet.
Are you interested in learning more about how Planon can help make your real estate and asset lease accounting compliant? Download our solution brochure.
