Conquering the growing complexity of lease accounting standards

By | 2 minute read | September 20, 2016

When people think about leases, the real estate industry immediately comes to mind. But for many companies — across all industries — leases are some of the most expensive assets on the balance sheet. Asset-intensive businesses also lease equipment, from lower cost assets such as IT equipment, to large assets such as fleets, airplanes, complex manufacturing equipment, industrial machines and nearly any other physical asset critical to business operations.

One of our clients is a major retailer with hundreds of megastores in the US. Despite this large real estate footprint, their biggest leased cost is their fleet of trucks, which moves goods through their supply chain. These fleet leases are complex because they are usage-driven, which requires unique accounting treatment.

With so many complex pieces and moving parts, it’s clear why managing leases is such a headache for so many companies. And it’s about to get harder.

The growing complexity of lease management and accounting

Lease management and accounting is about to get more complex and have an even greater impact on corporate financial reports. A deadline is looming for companies to comply with new lease accounting standards from both the FASB and IASB,  requiring companies to account for most operating leases on their balance sheets as early as January 1, 2019.

The new rules will have a significant impact on any business that has commercial leases. Yet, findings from a KPMG LLP survey ‘The Great Accounting Challenge‘ survey suggest that companies are vastly under-prepared. Of the companies surveyed, 92 percent said they will need to implement a new IT system but 81 percent said they haven’t begun. More than half haven’t even started assessing the impact of the new standards.

a pie chart illustration from KPMG on lease accounting standardsSource: KPMG LLP, The Great Accounting Challenge, KPMG’s 2016 Accounting Change Survey, 2016

Apply intelligence to lease accounting

It’s more critical than ever to apply intelligence to lease management and accounting as a result of regulatory changes. IBM’s real estate and facilities management solutions are serving as the basis for more intelligent lease accounting solutions being offered by accounting firms, which help asset-intensive companies account for lease transactions, deliver financial reporting to accounting stakeholders, and improve business intelligence by analyzing data on portfolios to make smarter financial and operations decisions.

KPMG recently announced the creation of an innovative solution for lease accounting – KPMG’s Leasing Tool – which leverages IBM TRIRIGA technology.  Companies such as Johnson & Johnson are using this solution to not only simplify compliance with new lease accounting standards, but also to find operational savings in their lease portfolios. You can learn more at KPMG’s Leasing Tool website.

In the future, we foresee cognitive computing being applied to lease accounting and management. Imagine Watson serving as a company’s CFO. By deploying IoT technologies to understand real estate usage in real-time, and then leveraging Watson to apply insights from this data, technology is poised to change how companies manage financial portfolios.

Explore this concept further in ‘This is my building’s final offer‘ an IBM article recently published in partnership with WIRED Brand Lab.

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