Readiness is the Best Game Plan
If you are feeling ill prepared for the coming Financial Accounting Standards Board (FASB) lease accounting changes, you are not alone. In the most recent “Trends in Real Estate Information Management” survey conducted by CoStar Real Estate Manager, 70% of respondents admitted to being unprepared for the pending FASB changes. How do you get ready for the inevitable? CoStar Real Estate Manager recommends focus in two primary areas: first, get your business ready and second, get your lease data ready.
In the proposed lease accounting changes, all leases over 12 months in length should be recognized and included on the balance sheet as assets and liabilities. Recognizing a lease as an asset and a liability requires determining initial value. Then, upon lease commencement, the asset and liability values are decremented or amortized two different ways based on the type of lease. Recognizing a lease under the prospective standard will involve both initial and subsequent measurement using the methods to be specified in the final standard.
Get your business ready
Assess the impact
Get your business ready by first creating a cross-functional team to identify and address all affected areas of the business. The cross-departmental collaboration should minimally include colleagues from real estate, accounting, IT, legal, compliance, treasury, risk and financial reporting. There are many questions the team will have to answer:
- Are we ready for the transition?
- Are we ready to defend it?
- Are we ready to prepare our financial restatements?
Streamline the lease recognition process
Because every lease in your portfolio must be reviewed at the individual lease level, you need to acknowledge the volume of work this will mean and the 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 making the same decisions repetitively for certain types of like-kind leases. If you can define these similar choices ahead of time, you can quickly apply these “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. Here are five areas in which you can apply this profiling method:
- General ledger accounts
- Projected growth
- Direct costs
- Discount Rate
Get your data ready
The second area to focus is making sure your data is ready. As lease recognition moves from the financial footnotes to the front pages of a company’s financial report, the need for good, reliable lease data becomes imperative. Remember – you need to get data ready for both real estate and non-real estate leases. This represents a great deal of work due to the sheer volume of leases, so start now to develop a collaborative approach among all cross-departmental groups in your company that deal with the leasing of all assets. The dilemma for many companies is where to begin. Assess your data readiness level by using the following best-practices recommendations to ensure your data is in great shape for the new lease accounting guidelines:
- Create a comprehensive inventory
- Ensure your data is reliable
- Make your data accessible
To view these practices in detail, view the full “Readiness is the Best Game Plan” document.
The prospective FASB lease accounting changes are on the way. Although there is uncertainty surrounding the details, there are actions you can take now to get prepared – regardless of the breadth of the changes. 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.
Interested in reading more? Download the full PDF article here.