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Assessing the impact of upcoming lease accounting changes

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Facilities Management Portfolio Marketing Leader, IBM

A hot topic in the facilities management area is new accounting standards from the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). These changes are expected to heavily impact organizations that need to abide by these new standards and have a large lease portfolio.

The rules require organizations to record the most recent and existing leases on their balance sheets. This requirement is expected to result in many leases that are now off balance sheet to appear on the balance sheet and therefore can have a detrimental effect on equity, debt-to-equity ratios and regulatory capital. Other onerous reporting and disclosure rules are also expected to require significant record keeping and increased complexity for the finance and accounting functions of organizations.

http://www.ibmbigdatahub.com/sites/default/files/blog_leaseaccounting_blog_1.jpgImminent changes

The FASB and IASB have been busy finalizing the lease accounting changes. One of the last steps in the process is the issuance of the fatal flaw document to select external parties for review. The standard drafts appear to have been approved by both boards, and the word on the street is that the fatal flaw document has been issued for review.

Typically, fatal flaw reviews are issued for a short time period. The boards then consider comments from the reviewers, and the final standard is then issued. In the case of lease accounting, final review is forthcoming, with all indications that the standards will be issued in the fourth quarter of 2015. It's expected standards will go into effect in 2018 for public companies and 2019 for nonpublic companies.

To prepare for the new lease accounting standard, many organizations may just simply focus on compliance only. That aspect alone requires system capabilities to simplify and adopt the complex new processes, automate audits and provide accurate visibility into balance sheet and income statements.

However, more forward-thinking organizations will be required to not only comply with the new standards, but they also need to use these new standards as a catalyst for fundamental change— shifting from short-term operational management to long-term financial management. Long-term financial management requires deep business insight and enhanced finance efficiency across all asset classes.

A lease accounting technology platform

Regardless of the approach chosen, an effective lease accounting solution should prove to be invaluable to organizations. As they research their options, they are expected to look for those options that work across real estate, equipment, information technology and infrastructure assets. The chosen solution should be equipped to deliver process management capabilities along with business analytics on a single technology platform. The technology platform that organizations choose needs to streamline integration of critical data with corporate financial accounting systems. The right lease accounting solution can help companies transform the way they manage their assets to achieve increased efficiencies, more effective utilization and greater financial return on assets.

Check out Action Plan to Prepare for the New Lease Accounting Standard for an in-depth look at preparation practices for the standard changes.