There has been much discussion surrounding the new lease accounting standards issued by the accounting boards in Q1 2016, which are set to take effect in 2019. All companies reporting under either the International Financial Reporting Standards (IFRS) or the United States Generally Accepted Accounting Principles (US GAAP) will need to comply with these new standards. With the two-year look-back period, companies will need to track and record all data relevant to the new standards immediately.
Good news or bad news?
The new standards fundamentally change the rules that govern accounting for the majority of all leases, inclusive of equipment and real estate leases. It is expected the standard will have extensive implications in areas such as accounting, finance, reporting, real estate strategy, tax and technology.
While making leases, a key feature of company’s balance sheets attains the accounting board’s goal of enhanced transparency in financial reporting; this could be bad news for you if your organization relies heavily on leasing for your operations.
It is estimated that several trillion dollars of operating lease obligations in total need to be added to corporate balance sheets. While these changes may not create new financial obligations, it will have an impact on financial ratios (e.g., return on assets and other key performance and financial metrics).
Along with changes comes a significant administrative burden, particularly if you do not have your data in order. To comply with the new standards, a solid process must be in place where you can track, leased portfolio and business data alongside treatment assumptions on an ongoing basis.
The good news is that for those with organized and accurate lease databases supported by robust technology systems and operational platforms, the effort to increase technology and data controls may not be as daunting as it first appears. However, based on my experience working with many organizations over the last 15 years, I know that tracking and maintaining accurate portfolio data can be a challenge—especially for firms lacking in systematized data management.
Going forward, leases could become a heavy burden on your shoulders, but being prepared will lighten the load.
How to prepare
As leases will now show up on the balance sheet, transformation across the business—technology, reporting and connectivity among different teams—must take place.
Our recommendations on how you can get ready can be summed up in three words—technology, operations and strategy.
- Leverage technology to assess (and modify as needed) the existing systems, evaluate the “day-one impact,” and review reporting requirements.
- Ensure the technology you adopt is capable of aggregating data from multiple sources and able to perform the necessary calculations.
- Ensure your data sources are accurate, complete and reliable enough for the required calculations.
- Establish and define the roles of all cross-functional team members, develop the necessary additional processes and controls, and modify BU metrics.
- Re-evaluate your methodology on making real estate decisions, modify the lease terms, and review the financing arrangements.
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