By Peter Brohoski, Senior Managing Director, Global Occupier Services; Nick Seaton, Director, Global Occupier Services, and Ryan Rawls, Managing Director, Global Occupier Services
The new lease accounting standards will require companies to record all leases (greater than 12 months in duration) on the balance sheet. Consequently, companies will rely on corporate real estate directors to organize real estate leases, and sometimes equipment leases, in a manner that will provide for accurate accounting calculations. This means all lease data must be accurate, complete and housed in a lease administration system that can facilitate timely / IFRS reporting. Given the increased scrutiny on lease costs, CRE directors may also be tasked with amending long standing leasing policies.
It’s essential to seek expertise to navigate through these changes and the resulting portfolio management impact to meet requirements consistent with overall corporate objectives. Corporate real estate professionals will generally need to follow a two-phase process – Phase 1: Readiness Assessment and Phase 2: Implementation.
Phase 1: Readiness Assessment
This phase primarily focuses on determining the steps organizations will need to make in order to become compliant by the first reporting period of 2019 for public companies, or 2020 for private companies that issue audited financial statements. During this phase, CRE directors evaluate their current state of readiness for compliance under the new FASB / IFRS rules. Specific actions during this phase will include:
- Data Analysis
- Evaluate composition of lease portfolio – asset type, space type, Location, lease structures (e.g. NNN, FS, etc)
- Confirm composition of sublease portfolio (as sublessor)
- Confirm the availability and location of all lease documentation
- Identify any gaps in lease data
- Consider leases that may be embedded within service contracts
- Technology Analysis
- Confirm readiness of existing lease admin technology platform
- Determine future technology requirements (as necessary)
- Determine if current system requires any updates based on application of standards
- Check for any gaps in lease data, including lease accounting data fields (i.e. Data Integrity Review)
- Determine whether additional data is required
III. CRE and Accounting Alignment
- Evaluate current workflow between Finance and CRE (lease approvals, equipment leases)
- Review Accounting Policies & Procedures – e.g. lease classification, incremental borrowing rate, etc.
- Assess current reporting requirements and workflow
- Review lease transaction policies, processes, approvals
- Impact Analysis
- Consider the overall occupancy cost of real estate leases
- Determine potential P&L and balance sheet impact
- Determine effect on key financial metrics and debt covenants
- Identify high impact leases and measure cost impact
- Review current portfolio leasing / management strategy – own vs. lease, typical market terms, etc.
Phase 2: Implementation
After assessing the current state of readiness and identifying gaps, CRE directors will need to act toward reaching preparedness. Depending on the findings from Phase 1, CRE directors will undertake some or all the following activities:
- Technology & Data Compliance
- As required, manage upgrade of existing system or transition to a new lease admin system
- Test existing or new lease admin system
- Fill data gaps to ensure accurate reporting
- Help design / complete custom reports required for financial reporting
- Create and Execute Transition Roadmap Determine implementation date and disclosure requirements
- Provide Guidance on CRE/Accounting Policy Requirements
- Work with Acct / Finance to assess /determine practical expedient elections
- Work with Acct / Finance to determine / implement new accounting policies – e.g. capitalization policy, materiality, discount rates, etc.
- Review disclosure requirements and consider impact on data and technology needs
- Provide guidance in designing new processes and procedures for financial reporting and SOX compliance
VII . Deploy new process and workflow requirements
- Update data collection and maintenance policies and processes to meet financial reporting requirements
- Update transaction approval processes and procedures
- Train affected stakeholders and staff
- Create model for ongoing refinement and improvement of new processes
VIII. Review Corporate Real Estate Strategy
- Align real estate transaction strategies with finance objectives
- Determine strategy for high impact leases
- Reassess own vs. lease policy
- Determine optimal leasing strategy – typical terms, NNN vs FS, etc.
Overall, while the new lease accounting standards may ultimately drive changes to a corporation’s overall real estate strategy, the most immediate concern is getting ready for compliance. The time to act is now!
Peter Brohoski is the Senior Managing Director of the Global Occupier Services group at Cushman & Wakefield.
Ryan Rawls is the Managing Director for the Global Occupier Services group at Cushman & Wakefield.
Nick Seaton is a Director for the Portfolio Administration team at Cushman & Wakefield for the APAC region, based in Singapore.