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April 13, 2017

Why the new lease accounting rules should cause the real estate and finance managers to join forces

Quite a lot will change in lease accounting beginning in 2019. That’s when the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) will be implementing new standards. This means that the roles of the real estate and finance manager will also change. They need each other to cope with the challenges of the new standards.

Webinar - How the new lease accounting standards will impact your business

Beginning January 1, 2019, the new Financial Accounting Standards Board (FASB) standards, ASC 842, will go into effect, bringing major changes to the way organizations’ handle their lease accounting. 

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Until the 1970s, it was usual for organizations to own virtually all of their own property, from real estate to trucks. Because a relatively large amount of money then had to be spent on equipment, there was less available to actually run the business. This gave rise to a new trend: leasing. Organizations no longer had to save up for major purchases, and the business resources that were now rented were no longer shown as debts on the balance sheet. This also meant that the figures looked somewhat better on paper. The new lease accounting standards will put an end to all of this. To open the way to financial transparency, exchange-listed companies must state all of their leasing contracts on their balance sheets beginning on January 1, 2019.

New tasks for the new standards

The new lease accounting standards will change the finance manager’s work. Leasing contracts that previously might have been less important for the financial administration will now play a larger role. This is because it is no longer simply about what an organization pays to a leasing company each month. The finance manager has to incorporate this in his valuation of the liability and the property on the balance sheet. That’s quite a challenge. Where he could formerly report simply on the costs of leasing contracts, now in terms of the new standards he must also report the value of these contracts and the underlying information.

On the other side, you have the real estate manager, and as 2019 looms he needs to give much more thought to the financial impacts of leasing arrangements he makes. No longer can he just mention the leasing costs for a set of premises, but he must also refer to the impact of those costs on the profit and loss account and the balance sheet

  
Who will resolve the puzzle?

What do both real estate managers and finance managers have to do to be ready for the new standards? For the finance manager, it is important to know just what he has to report. Of course, he could read through all the leasing contracts—often dozens of pages each—to be able to grasp their financial impact. But, he would be better to call on the real estate manager, who knows exactly what’s in the contracts. For his part, the real estate manager is most likely not as involved in the impact of these contracts on the balance sheet. In short, 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 would 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 more efficient in this context: 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 lies in close collaboration between the real estate manager and finance manager. But wasn’t that already the case? Certainly, because a lot of capital is tied up real estate after all—an important reason for both parties to talk to each other now and then. But now that the finance manager’s reporting responsibility is growing, he has an even greater need for the real estate manager to be able to substantiate all the figures neatly on the balance sheet, and to keep them up to date. Without each other’s help, 2019 will become a very tight deadline.

David Stillebroer
Director Product Management

Would you like to know how Planon can help to make your real estate and asset lease accounting compliant? Then please download our solution brochure.