Counter upcoming changes in the lease accounting landscape

Go-to-Market Manager, Internet of Things Division, IBM

What is changing in lease accounting, and why?

Both the Federal Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) believe that provisions in their current lease accounting standards that require organizations to place some leases (capital leases) on the balance sheet and some lease assets off their balance sheet (operating leases) don’t represent the most accurate financial position to the users of the financial statements—for example, tax authorities, investors, creditors and so on. Thus, proposed changes in lease accounting rules add all long-term leases (operating and capital leases more than one year in length) to the balance sheets of public companies.

What are the impacts of lease accounting changes?

Once the new lease accounting standards are implemented, the impact could be substantial for companies that currently rely on operating leases for their facilities. More than half of the respondents from a previous CFO Research and IBM study thought the new lease accounting standards would change the way they measure financial performance and would cause their companies to change contracting processes to accommodate tax implications.

In another lease accounting study conducted by CFO Research and IBM, close to half of the respondents expected they would have to reprogram, upgrade or implement new asset management, financial management and real estate and facilities management systems to comply with the new lease accounting standards.

In addition, two-thirds of finance executives (66 percent) believe the proposed changes to lease accounting standards will make it more important than ever to optimize real estate portfolios—for example, by consolidating or disposing of underutilized assets.

One Vice President of Finance from the healthcare industry writes:

“Generally, while the RE portfolio has been very well managed from a maintenance perspective, the capital structure of our real estate portfolio has been under-managed. [The] need is in monetizing excess real estate and optimizing the real estate portfolio to strengthen the balance sheet.”

In order for finance, real estate and asset management executives to comply with the new accounting standards, they must consider three things:

  1. New rule changes require a single lease accounting software for all classes of leased assets—real property, fleet, equipment and infrastructure—to streamline a company's lease accounting within the operational and financial functions. This software must provide consistent management of approvals and audits data changes within an enterprise-class database repository.
  2. Accurate lease accounting involves new lease accounting fields and processes compliant with rule changes to avoid unauditable financial reports and costly financial restatements. These revised rules increase the complexity of lease accounting with major new requirements for managing and tracking financial assumptions related to renewal options. For nearly two-thirds of organizations, these requirements dictate more current or upgraded lease accounting software and related systems.
  3. Beyond compliance, this new lease accounting standard creates the opportunity for competitive advantage. As companies undertake the detailed work to size their lease portfolio, many will find that these assets are inefficient and will eliminate them from the balance sheet before they drag down return on assets or trigger debt covenants. To achieve this reduction, companies should employ strategic facility planning and scenario analysis to increase utilization of leased assets and decrease the number of facilities across the company, which in turn generates better corporate return on assets—a critical financial performance metrics for public companies.

Address your lease accounting needs

When evaluating lease accounting software to meet your goals, IBM lease accounting software accelerates preparedness with the new FASB and IASB lease accounting standards with pre-built spreadsheets and templates compliant with Open Standards Consortium for Real Estate (OSCRE) data standards for faster loading of lease information. IBM software includes the necessary financial reporting to achieve auditable lease accounting with simple-to-use, ready-made reports and financial assumption management capabilities. And it helps reduce or eliminate the need for underutilized leased assets with advanced strategic facility planning capabilities. View a two-minute overview video of IBM Lease Accounting Software.