By Steven Brenner
With the news that the Financial Accounting Standards Board (FASB) – in conjunction with the International Accounting Standards Board (IASB) – intends to formally move forward with plans that will fundamentally alter the way that leases are accounted for on financial statements, businesses are recognizing that they will need to adapt. However, what organizations will specifically need to do in order to comply with the new standards are still open questions for most companies.
Organizations will not only need to change their lease accounting processes for everything from property and buildings to machinery and equipment, but they also will be faced with more nuanced strategic questions about how the new standards will impact their operation and how they can prepare for the changes in a way that avoids unnecessary rework and lessens the risk of disruption or noncompliance.
Successfully integrating these changes into your business begins with understanding what changes are needed, what they mean, and what solutions are available for you to efficiently and effectively make the transition process a seamless (and painless) experience.
What it is
The new FASB regulations will require businesses to report any long-term lease liabilities (defined as those that run longer than twelve months) on the balance sheet. Under the current reporting requirements, the long-term portion of leases is reported as both a literal and figurative footnote in the financial statements.
When the new regulations go into effect, however, these leases will need to be reported entirely on the balance sheet in the liability section. While this FASB change will impact businesses in every industry, it will be particularly significant for lease-intensive businesses in highly regulated industries, such as manufacturing, utilities, health care, and financial services.
While a hard deadline has not yet been set, the current time frame for when these new standards officially go into effect is roughly late 2015 to early 2016.
What it means
While the reporting changes will not directly affect how business is conducted, the changes will have a significant internal impact on financial reporting, including financial ratios and reported liabilities. While the specific penalties for noncompliance have not been clearly defined at this time, the consequences for companies that are unprepared for the new standards to take effect are likely to be significant.
Companies that are in a reactive posture and scrambling to manually change reports and review statements, one line item at a time, in order to avoid potentially damaging penalties will likely end up exhausting a great deal of time and money. The confusion and delays can be avoided, but the window of opportunity to be proactive will not remain open forever.
The reality is this: Whether you manage your lease accounting manually or with sophisticated software solutions, the time to thoroughly analyze your existing processes and determine where and how your business processes need changing is now.
One of the most important steps that any company can take to prepare for this regulatory change is to perform a detailed "what if?" analysis. Engaging in such a process from the top down allows you to look upstream – to see what your financial statements will look like under the new guidelines and help you determine what changes need to be made at the earliest point in the process to ensure that you are not only compliant, but also efficient.
It may sound like a simple step, but asking (and answering) pointed questions, such as "If I had to provide information for the new standards now, what would that look like?" and "Will I be able to produce/provide that information in a timely manner?", will help you determine where you are and where you need to be.
This process will also allow companies to identify how much important information needs to be made more accessible and to make the required strategic changes prior to the launch of the new mandates. Businesses that perform these changes now will be able to adapt much faster to the new standards by getting out in front of the issue now. They will be better prepared for either modifying an existing system or installing a new system that can provide the needed functionality.
For many businesses, Real Estate Management (REM) software may be a good investment to help with the transition process and the new accounting standards. Sophisticated software solutions can help businesses maintain compliance while streamlining critical processes.
The best software platforms are specifically designed to automate lease administration and space management for all businesses (regardless of industry), while ensuring full compliance with reporting standards. This not only takes a business away from the manual data entry protocols that can lead to oversights, human error, and noncompliance, it also helps to simplify the transition and allows for all critical data to be in a centralized new system.
The best REM software solutions are highly flexible and can be configured to integrate smoothly with your existing technical architecture and operational priorities. In short, these solutions will allow your team to do what they need to do, while working in the background to collect and present the information that the finance/accounting department needs.
While REM solutions can add valuable efficiencies at any time, implementing such a system prior to the rollout of the new mandate would help to make the transition process seamless, by providing you and your team with the necessary time required to complete the learning curve and adjust to the new software. Specifically, when the FASB changes do go into effect, REM will have the software updates ready to help your organization transition automatically to satisfy the new reporting standards.
While some of the specifics and enforcement details remain to be ironed out, one thing is certain: this FASB-mandated change is coming. No matter what industry you are in, it makes logistical and financial sense to prepare now to ensure that your business is fully prepared when these new standards go into effect.
- Public Comment Period on Lease Accounting Draws Near
- Fitch: Lease Accounting Proposal Expected to Challenge Lessors
- Joint Roundtable Meetings Set on Lease Accounting Proposal
About the author:
Steven Brenner serves as senior principal consultant of MIPRO, a consultancy specializing in implementations, upgrades, and optimizations of Oracle's PeopleSoft applications. Brenner can be reached at [email protected]. To learn more about MIPRO, visit www.miproconsulting.com.