How to reduce anxiety over lease accounting changes

By and Dave Dilworth | 5 minute read | February 20, 2018

If you’re reading this, you probably already know that upcoming changes to regulations issued by the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) mean that leases are getting capitalized on your books. But do you know the requirements to comply with these new regulations? Or which milestones to hit between now and when the new standards go into effect this year.

IBM has been preparing for the changes since they were first announced. The company has already incorporated them into the IBM TRIRIGA® integrated workplace management system (IWMS). With TRIRIGA, you’ll be able to navigate through the FASB and IASB changes and ensure compliance with all new regulations.

Identify affected leases and renewal options

The bad news first: If you haven’t already started preparing for these changes, you’re probably behind. Compliance begins in a company’s first fiscal year under the new standard. However, private companies have one additional year before compliance begins. The biggest challenge for many organizations will be collecting all relevant data from their portfolios and identifying all leases. That’s something that’s far easier to do with the aid of TRIRIGA, especially for users of TRIRIGA’s Real Estate Manager software.

Renewal options are a common gap in older lease administration systems. If your company policies will include such options in likely term decisions, you’ll have to go back through your records and track down all renewal information for each individual lease. This underlines the importance of having consistent company-wide policies. With them, it’s easier to structure and expedite implementations across the board.

Under existing lease accounting standards, the accounting for renewal periods begins at the commencement of those periods. Under the new standards, however, there is a requirement to re-measure the new liability at the time the option becomes reasonably certain of being exercised.  This requirement is already affecting the lease renewal process, according to lease accounting expert Tracy Owens of eCIFM, an IBM partner and TRIRIGA implementer.

Concerns and solutions: liability

The development of TRIRIGA is done with business operations in mind, starting at the beginning of the lease procurement process. In comparison, other contract management systems are not being built to manage that process. Neither are they built to provide auditability of every lease. TRIRIGA is also easily configured for elements specific to your business.

Still, different members of your organization will have different concerns about the changes. The concern for corporate real estate managers is the liability corporations assume when they sign a lease. Because your real estate team puts assets and liabilities on the balance sheets under the new standards, there is more scrutiny of both. Lease structures built in 1976 under FASB 13 (and in 1984 under IAS 17) will now yield different—and likely worse—results under the new rules. Companies that tackle this new compliance challenge early will be better able to strategically drive ROI on that compliance.

To address concerns about liabilities, TRIRIGA provides a full view of lease terms. This gives corporate managers a clear view into where liabilities can be cut, resulting in savings and increases in efficiency. In most leases, the liability will be larger under the new standards. As companies start to review and restructure their lease timing, TRIRIGA can help. With it, companies can see the impact and measure all the pieces—which is the key to getting results.

Concerns and solutions: the effect on shareholder equity

Corporate finance executives have a specific concern about the lease accounting standard changes: the effect on shareholder equity. When leases go on the books, it reduces this equity. This is where efficient operations and space management will pay off:

  •        Getting the most profitable use out of every space in a real estate portfolio
  •        Eliminating unused space to offset equity loss
  •        Possible additional efficiencies when leases update or come up for renewal.

As Dave Dilworth wrote in June 2017, specific TRIRIGA developments for CFOs and CAOs include sub-ledgers for journaling, closing periods and creating reports. To account for all services and spending, managers and occupants of specific facilities receive mobile app updates.

This video summarizes the ways IBM TRIRIGA’s Real Estate Manager software can aid you in lease accounting:

And if you would like to know more about how TRIRIGA helps make better space management decisions, take a look at this video:

Accounting firms and TRIRIGA

IBM has worked with all of the big four accounting firms in TRIRIGA development and implementation. Two of the four use TRIRIGA for their worldwide portfolios. Many large organizations use the services that these firms provide. They have a keen interest in the accurate and effective incorporation of the lease accounting changes in the software.

Your accounting team, plus other departments in your company, will have plenty to do in preparation for the updates. Staff workloads may increase due to the necessary data entry and data crunching required to implement the new regulations. Your lease administration group may also see an uptick in personnel. The sooner you begin to implement the changes, the easier it will be to manage these workload challenges.

We could do this with spreadsheets, right?

Some lease administrators still juggle spreadsheets or use standard lease administration systems. But those methods quickly become unworkable for companies with real estate portfolios numbering in even the low hundreds. It’s a recipe for introducing errors. Or for leaving gaps in the data while calculating net present value and deciding your likely lease options.

Although your straightforward calculations for, say, a fifteen-year lease will allow for the same payment amount over time, the new standards mean your asset and liability values can change daily. Tracking those daily changes across a multi-lease portfolio is unmanageable and, for all practical purposes, impossible. Oh, and you’ll also have to account for interest changes. To accurately accommodate the FASB and IASB changes, using spreadsheets will not be a viable option.

Sleep easy with TRIRIGA

If you’re not currently a TRIRIGA user, be aware that implementation of the system is not an overnight process. Moreover, the expertise required for accurate implementation is in increasingly short supply as the deadline approaches. Fortunately, eCIFM has a Data Migrator to simplify the move and help you be up and running on TRIRIGA as swiftly as possible. You’ll be able to start using your data to increase efficiency, cut costs and find new revenue opportunities. As the FASB and IASB compliance deadline arrives, you’ll be able to rest easy.