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You Can’t Avoid FASB Changes Forever

Two things you can do now to prepare for the financial impact to your balance sheets

By Andy Thomas, athomas@virtualpremise.com

It looks like the Financial Accounting Standards Board (FASB) lease accounting change guidelines, originally expected to be issued in 2011, are once again being delayed. And while these constant delays may have corporate executives scratching their heads in a bit of disbelief, two things are still painfully clear: FASB change is definitely coming, and the changes will have a significant impact on the way your company does business if you maintain any long-term leases.

The changes will introduce an unprecedented, one-time impact on retail and corporate balance sheets by creating a substantial increase in assets, representing the right to use real estate and other property, such as equipment leases, and a corresponding increase in liabilities, representing the present value of the lease payments. Senior company executives and their respective Boards of Directors will want to know how the FASB changes will impact their balance sheets and answering these questions will require a substantial amount of work by lease administration executives. 

Many in the real estate and lease administration industry are dreading the upcoming FASB changes, seeing only significant work in the short term and a potentially negative financial impact in the longer term. However, savvy real estate and operations professionals who plan wisely will put themselves ahead of the curve and provide their organizations with ways to leverage FASB change for positive gain. And along the way create an opportunity to assume a more visible role in the financial management of their companies, becoming part of the team that shapes their company’s leasing and business strategies.

For those feeling a bit behind, now’s the time to get your plan in motion. Preemptive preparation is the key. Focusing on the things you will need to evaluate your leases will give you the insight needed to (a) quantify the impact these changes will have on your company’s financial statements and (b) be prepared when the Board of Directors asks the question “What is the impact on our company?”

To get started, here are the two questions you need to answer: 

  1. How well is my business prepared?
  2. How good is our existing data?

Prepare Your Business
So, having more time than originally expected to prepare for the FASB changes, how ready are today’s real estate professionals? Unfortunately, based on a number of industry surveys conducted among real estate professionals, the answer is “Not very.” According to the Virtual Premise “Trends in Real Estate Information Management” survey, two thirds of respondents admit to being unprepared for FASB changes.

To prepare your business, we recommend you create a cross-functional team to identify and address all areas potentially impacted by FASB changes, including management of real estate holdings, as well as other leases greater than 12 months in duration. Your team should be able to assess the impact of the changes by addressing the following questions about your business:

  • Are we ready for the transition?
  • Are we ready to defend the numbers?
  • Are we ready to prepare our financial restatements?

Once you have assessed the impact the changes could have on your business, the next step is to streamline the lease recognition process. Because every lease in your portfolio must be reviewed at the individual lease level, you need to understand how much additional work this will create for your team, as well as how many additional resources you will need to dedicate to this effort.

As you work through the lease recognition process for each and every lease, you may find yourself repeatedly making the same decisions for certain types of like-kind leases. If you can define these similar decision choices ahead of time, you can quickly apply profiles to your leases, as applicable. The result is an aggregation of common lease recognition decisions, which greatly speeds data entry, ensures consistency and improves accuracy.

This kind of profiling can be applied in several areas, including:

  • General ledger accounts coding/distribution
  • Projected growth
  • Direct costs
  • Cost of capital
  • Review frequency

Evaluate Your Data
Once you have taken the appropriate steps to prepare your business, focus on your data. As lease reporting changes, moving from the footnotes to the front page of a company’s financial report, the need for good, reliable lease data becomes imperative. And remember, this data includes both real estate and non-real estate leases. As a result, we recommend you develop a collaborative approach among all cross-departmental groups in your company that deal with the leasing of all assets.

As you work to get your business ready, it’s important to ensure your data is accurate and encompasses all leases. That way you’ll be assured of paying expenses accurately, without risk of long-term over-payments. While this process may seem daunting and overwhelming at times, these changes present a valuable opportunity for you to get your lease management house in order before the final FASB standard is released.

To understand how good your data really is, ask yourself these questions: Do you have a complete inventory of every lease in your portfolio? Is the information you have captured for each location or lease reliable? Is the information readily accessible? Once you’ve established your data’s readiness level, use the following best-practices recommendations to ensure your data is in great shape for the new lease accounting guidelines:

  • Create a Comprehensive Inventory. The more familiar you are with the leases you have, the better prepared you will be to manage them. Since FASB changes will impact the accounting of all leases with terms over 12 months, it will be necessary to conduct a total organization review to ensure you’ve accounted for all elements impacted by FASB change.
  • Ensure Your Data is Reliable. Accurate data is reliable data. Therefore, if your company does not have a quality review process in place, it may be difficult to ensure your consolidated data is accurate. We recommend the following tips for creating accurate data:
    • Assign a dedicated quality control manager to the project
    • Review all data
    • Document the abstract process and instructions
    • Provide written training materials
    • Generate discrepancy reports
  • Make Your Data Accessible. Ensure that lease data is readily accessible in electronic form, as well as the typical physical files. That way, if team members in remote offices require access to files at the same time, they can more easily collaborate. Plus, having file redundancy is good in the event a disaster strikes.

The prospective FASB lease accounting changes are definitely on the way. Although there is uncertainty surrounding the final details and implementation dates, there are actions you can take now to ensure your CEO and CFO fully understand the impact these changes will have on the dollar value of your organization’s balance sheet. These actions will likely prove to be a tremendous benefit to your company. With any challenge of this magnitude comes opportunity — an opportunity to streamline, organize, and uncover efficiencies will save your organization time and money. You can choose to be reactive or you can proactively seize this unique chance to better position your company for successful financial management.

Need more help on preparing for the FASB changes? Download our two white papers:

Andy Thomas has more than 20 years of real estate, technology and finance experience. As president and COO since 2001, Thomas leads Virtual Premise's overall operations and strategy development. Prior to joining Virtual Premise, Thomas spent 12 years at Equitable Real Estate, serving as an executive VP with involvement in the start-up and growth of multiple new initiatives and companies, including the acquisition, debt placement and asset management of several billion dollars of commercial real estate assets. Thomas received an MBA from the University of Pennsylvania's Wharton School and a Bachelor of Science degree in Building Construction from the Georgia Institute of Technology. He can be reached at athomas@virtualpremise.com.


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