If you are not aware of the impact that the new FASB 13 rules being introduced this year will have on your company then you must read this. It is startling!
3 Things Manufacturers Need to Know About Their Accounting for Leases
The New Lease Accounting Standard And You Whitepaper
1. 1 The New Lease Accounting Standard and You
Part 1: Introduction
The U.S.-based Financial Accounting Standards Board (FASB)
and the European-based International Accounting Standards
Board (IASB) are jointly preparing a new standard for lease
accounting. For many years there has been general agreement
in the accounting and investment communities that a revised
lease accounting standard was needed. FASB and IASB have
been working diligently over the last few years to create this
new standard.
While the new lease accounting standard has not yet been
issued, much of what is likely to appear in the new standard
is detailed in a Discussion Paper released by FASB in March
of 2009. The primary objective of the new standard is to
recognize all leases as obligations that should be included
on company balance sheets. Under current lease accounting
rules, leases categorized as operating leases are not included
on the balance sheet.
The U.S. Securities and Exchange Commission (SEC) has
estimated that approximately $1.3 trillion of operating lease
obligations will be added to corporate balance sheets once
the new lease accounting rules are implemented. For some
large companies, the new standard will result in a multi-
billion dollar impact to the balance sheet.
The proposed lease accounting standard will precipitate
fundamental changes in the management of corporate
real estate. Companies will need to reevaluate real estate
strategy once operating leases can no longer be left off the
balance sheet. New processes, systems and personnel will
become necessary to comply with the standard. The lease
accounting changes will create a host of ancillary effects
that companies will have to address; ranging from the
potential need to renegotiate existing debt covenants to the
effect on internal budgeting and business unit contribution
margins. Moreover, as investors and senior executives realize
the impact of leases on the balance sheet, a giant spotlight
will fall on corporate real estate. Corporate real estate will
become integral to discussions about corporate financial
structure and performance.
Part 2: Why? When? What? How?
Why is a new lease accounting standard needed?
Presently, operating leases do not appear on company
balance sheets even though, for many companies, these
lease obligations are the single biggest category of long-term
liabilities. This creates a problem because balance sheets
are supposed to provide a snapshot of a company’s financial
position. Ideally, the balance sheet should show what a
company owns and owes. Investors, lenders, customers and
others rely on the balance sheet as a primary data source to
understand the financial health of a company.
The absence of operating leases on the balance sheet has
an especially distorting effect on financial statements in
today’s economy where many companies employ a workforce
of knowledge workers who predominately work in leased
space. Failing to account for these lease obligations on the
balance sheet leaves a big gap in the complete disclosure
of a company’s financial position. And, while it is true that
companies are required to include information about their
minimum lease obligations in the notes to their financial
statements, this information is insufficient to provide
investors with a complete picture of actual liabilities.
When will the new lease accounting standard be in place?
FASB and IASB issued a Discussion Paper on lease accounting in
March of 2009 in which the proposed new accounting standard
was outlined. Subsequently, meetings were held to consider
comments made by interested parties and to address details
not covered in the Discussion Paper.
Publication Date: July, 2010
Bob Cook | Corporate Real Estate Consultant
Bob Cook is a corporate real estate consultant whose focus is strategic and financial planning. Over the last 13 years, Bob has held
strategic planning positions within the corporate real estate departments of Northrop Grumman, Cisco, Sun Microsystems, and JDSU.
Prior to that he was a real estate developer of office high-rises in Chicago with Rubloff Inc. In addition, he has been a Senior Fellow at
the National University of Singapore where he taught real estate development and international real estate. Bob holds both a Masters of
Management (Finance) from Northwestern University’s Kellogg Graduate School of Management and a Masters of Architecture in Urban
Design from Rice University.
The New Lease Accounting Standard and You
2. 2 The New Lease Accounting Standard and You
In the third quarter of 2010, FASB and IASB plan to issue an
Exposure Draft that will outline their current vision of the new
accounting rules. Interested parties can submit comments on
the Exposure Draft through the end of 2010. The accounting
boards plan to issue the Final Standard by the second quarter
of 2011 (See Figure 1).
Although the schedule for finalizing the new standard is fairly
well known, the timeframe for when the new rules will become
effective is less certain. In order to afford companies the time
necessary to comply with the new standard, FASB and IASB will
provide a reasonable period of time between issuance of the
standard and the Effective Date for compliance.
Estimates of how much time the accounting boards will give
companies to comply varies, but most observers think the
Effective Date will fall somewhere between 2012 and 2013.
It is important to note that the new lease accounting rules
will likely require that existing leases entered into prior to
the Effective Date be added to the balance sheet and be
accounted for as a new lease with a start date equal to the
date that the new lease accounting standard is adopted. Under
this scenario, the new standard will affect any leases signed
prior to the Effective Date that are still active when the lease
accounting standard is implemented.
What changes are proposed with the new lease accounting
standard?
The following description of the new lease accounting
standard is based on the Discussion Paper of March 2009 and
from meetings held subsequently by the accounting boards.
Some details of the final standard may vary, but fundamental
changes are unlikely.
No more classification of leases
Unlike present lease accounting rules, under the new
standard leases will no longer be classified as operating
leases or capital leases. All leases will be accounted for the
same and all leases will be included on the balance sheet
(see Figure 2).
Lease vs Service
Under the proposed changes, payment obligations will
be bifurcated into a “lease component” and a “service
component”. The service component includes items
like operating expense pass-throughs. Only the “lease
component” will be included on the balance sheet. The
service component will be expensed as incurred and
accounted for on the profit and loss statement (P&L).
It is interesting to note that some service contracts might
be deemed to have a “lease component” that must be
capitalized. For example, a long-term logistics-support
contract that dedicates warehouse space to a customer
would require that the payments made to the logistics
support provider be bifurcated into “lease” and “service”
components and accounted for accordingly.
“Likely” lease obligation
Under the new lease accounting standard, all “likely” lease
obligations will be included on the balance sheet. This
differs significantly from existing capital lease accounting
standard that require only the “minimum” lease obligation
be accounted for on the balance sheet.
For each lease that contains an option to extend a lease
or buy the leased property, the likely lease obligation will
need to be projected based on the likelihood that the
lease options will be exercised. Also, when the option to
renew sets the rental rate based on a future market rate,
an assumption of that future rate would likely be required.
A projection of likely lease obligations would also have to
include an estimate for contingent rents. For example, in
the case where a retail store’s rent is partially determined
by the sales volume of the store, future sales volumes
would need to be estimated in order to project the likely
lease obligation.
Assumptions related to likelihood of renewal, future rental
rates and contingent rents will all have to be updated
periodically as business conditions and company strategies
change.
Balance sheet
Assets and liabilities
Under the proposed lease accounting rules, leases will
be accounted for as an asset and liability on the balance
Figure 1: Timeline to create new lease accounting standard
Timeline to new standard
3. 3 The New Lease Accounting Standard and You
sheet. Lease obligations will be included on the asset
side of the balance sheet as ‘right-to-use assets’, and on
the liability side of the balance sheet as lease liabilities.
When a lease is initially placed on the balance sheet, the
asset and the liability will be valued equally. This initial
value will be equal to the present value of the likely lease
obligations discounted at the company’s incremental cost
of debt at lease signing.
The right-to-use asset will be depreciated on a straight-
line basis over the lease term (i.e., the asset value will
decrease by the same amount each reporting period). The
lease liability will be amortized over the lease term based
on an amortization schedule similar to a self-amortizing
loan. With this structure, the liability will decline slower
in early reporting periods than in later reporting periods.
P&L statement
Under the new lease accounting standard, companies
will no longer account for the rent expense as a line item
on the P&L. Instead, rent obligations will be split into
depreciation of the right-to-use asset and interest on
the lease liability. The depreciation expense results from
depreciating the right-to-use asset over the lease term.
The interest expense results from an imputed interest
charge on the outstanding lease liability. (The actual rent
payment is split into payment to interest and payment to
principle, with the later reducing the liability carried on
the balance sheet.)
Unresolved issues
As of this writing, there are two significant issues under
deliberation by the accounting boards. The first concerns
sublease accounting which is entwined with deliberations
regarding how lessor accounting should be treated. This
issue will probably be covered in the upcoming Exposure
Draft. The second issue is in regards to the Effective Date
when the new lease accounting will be required. The
Effective Date may not be known until the final lease
accounting standard is issued in 2011.
How will companies transition to new lease accounting?
The transition rules are not yet finalized, but the accounting
boards have suggested a course of action. On the date a
company adopts the new standard, operating leases would all
be added to the balance sheet as if they were new leases on
that date. Although existing capital leases will already be on
the balance sheet, an adjustment may be needed to account
for renewal options where rights to renew are likely to be
exercised. In addition, for those companies prepared to adopt
the new accounting standard prior to the Effective Date, FASB
and IASB may permit early implementation.
Figure 2: Present vs New Lease Accounting
Present vs New Lease Accounting
Present New
4. 4 The New Lease Accounting Standard and You
Part 3: New Lease Accounting Example
Let’s take a look at an example of how the new lease
accounting standard will affect financial statements. Consider
a four-year lease with a rental rate of $1,000 per year. Under
present accounting rules, this lease would most likely be
classified as an operating lease. As such, it would have the
following impacts on financial statements:
▪▪ No impact on the balance sheet
▪▪ P&L impact would simply be a “rent expense” of $1,000
per year
Now let’s look at how this lease would be accounted for under
the new lease accounting standard.
Balance Sheet
At the signing of the lease, the present value of the four years
of payments would go onto the balance sheet, both as an
asset and a liability. In this case, assuming a discount rate of
6%, the present value would be $3,465 (see Figure 3).
Using straight-line depreciation, asset values decline evenly
over the life of the four year lease at a rate of $866 per
year. The lease liability declines at a slower rate than the
asset value based on the amortization schedule that divides
the $1,000 annual payment into an interest payment and a
principle payment that reduces the lease liability.
Important to note: Initially, the impact on company net
worth (i.e. the difference between assets and liabilities on
the balance sheet) is zero. In subsequent periods, however,
the impact on net worth will be negative. The deteriorating
balance sheet metrics may be material for companies heavily
dependent on operating leases. For example, the increased
debt to net income ratio (aka the debt-coverage ratio) may
violate debt covenants and provide the lender with a legal
right to raise interest rates or even call in a loan early.
P&L Statement
For this lease example, the P&L statement will show a
depreciation expense of $866 per year over the life of the
lease. In addition to the depreciation expense, there will
also be an interest expense on the outstanding balance of
the lease liability. The first year interest would be $208 and
each subsequent year the interest expense would be slightly
lower as the lease liability is reduced. With the current lease
example, the interest expense would be only $57 in year four.
Important to note: During the first half of the lease term,
P&L expenses associated with the lease will be greater than
the rent expense under current lease accounting rules. In the
second half of the lease the opposite is true; P&L expenses
associated with the lease will be less than the rent expense
under the previous rules (see Figure 4). This phenomenon is
more pronounced with longer lease terms. The P&L expenses
associated with leases also will be larger in the early years of
the lease term than they would have been under present lease
accounting, causing budgeting challenges when the standard
is first adopted.
The silver lining: Interestingly, the new lease accounting
will have a positive effect on Earnings Before Interest
Taxes Depreciation and Amortization (EBITDA), which many
companies use as an important measure of profitability. Under
the new lease standard, EBITDA will improve because the
interest and depreciation expenses that will replace today’s
rent expense are, by definition, not included in the EBITDA
calculation.
Figure 3: Lease Example with New Accounting Standard
Year 1 2 3 4
Cash Flow 1,000 1,000 1,000 1,000
Year 1 2 3 4
Asset 3,465 2,599 1,733 866
Liability 3,465 2,673 1,833 943
Year 1 2 3 4
Depreciation 866 866 866 866
Interest 208 160 110 57
Total 1,074 1,027 976 923
Year 1 2 3 4
Begin Balance 3,465 2,673 1,833 943
Interest 208 160 110 57
Payment 1,000 1,000 1,000 1,000
End Balance 2,673 1,833 943 0
Cash
Flow
Balance
Sheet
at beginning
of year
P&L
Expense
Lease
Liability
Acctg
PresentValue(1st
year)
Interest
Expense
BeginningBalance
t
t
t
t
Illustrative lease - Length: 4 years | Net Rent: $1,000/year | Discount rate: 6%
Illustration of New Lease Accounting
Year 1 2 3 4 Total
Present Accounting - Rent
expense
$1,000 $1,000 $1,000 $1,000 $4,000
New Accounting - Interest
and Depreciation expense
$1,074 $1,027 $976 $923 $4,000
New Accounting -Interest and
Depreciation expense
Year
P&LExpense
1 2 3 4
$1,100
$1,050
$1,000
$950
$900
P&L Expense: Present vs New Lease Accounting
Figure 4: P&L Expense - Present vs New Lease Accounting
Present Accounting - Rent expense
5. 5 The New Lease Accounting Standard and You
Part 4: New Visibility, New Responsibilities
The spotlight on real estate
The new lease accounting standard will effectively shine
a huge spotlight on corporate real estate. The size of lease
obligations will become very visible since leases will have their
own line items among the other assets and liabilities on the
balance sheet.
The size of lease obligations will be very large for many
companies. Retailers and restaurant-chains will post some of
the largest lease obligations. Some of these companies will
add more than $10 billion of liabilities to the balance sheet.
The size of lease obligations that non-retail companies post,
although smaller than that of retailers, will be eye-opening to
investors. While it is widely understood that many retailers
lease a significant percentage of their real estate, the lease
obligations of non-retailers have historically attracted little
attention.
Companies with a large number of knowledge workers sitting
in leased offices will be particularly affected by the new
standard. Several companies in the tech industry will add
more than $1 billion of obligations to their balance sheets (see
Figure 5). No matter the size of the company, the value of
leases added to the balance sheet will be surprising to many.
For many companies, lease liabilities will exceed those of
any other type of long-term liability on the company balance
sheet.
The spotlight on you
The spotlight on leases will extend to those who are involved
in managing or accounting for the real estate portfolio. As
lease obligations become more visible, investors will begin to
ask questions about how lease obligations are managed and
company executives will direct these questions to corporate
real estate departments.
The new attention paid to corporate real estate will deliver
a mixed blessing. The questions asked by investors and
executives may be hard-hitting and difficult to answer. At the
same time, the corporate real estate function will gain new-
found respect from senior executives and some corporate real
estate executives will be included in top strategic discussions
related to company cost-structure and profitability. Moreover,
those involved in corporate real estate will find a host of new
responsibilities and challenges including the following:
▪▪ Rethinking strategy
▪▪ Reformulating budgets
▪▪ Communicating the implications of the new
accounting to stakeholders
▪▪ Creating and managing processes to comply
with the new standard
Rethinking real estate strategy
Portfolio planning
Long-term real estate portfolio planning will take on new
meaning as a result of the new lease accounting. Corporate
real estate professionals will make many forward-looking
assumptions and create documented plans to justify
assumptions and withstand the scrutiny of auditors.
Auditors will scrutinize companies that assume that lease
options will expire without adequate justification since this
tactic may be adopted in order to minimize the asset value of
the obligation. Conversely, auditors might also be alerted when
companies assume that most lease options will be exercised
since this could be a tactic to improve financial performance
at a later date by reversing the renewal assumption when the
liability reduction from the assumption change is likely to
exceed the asset reduction.
While auditors scrutinize lease term assumptions, executive
management will watch to make sure lease assumptions are
as beneficial to the balance sheet as legitimately possible. In
short, those involved in the lease assumption process can look
forward to many people looking over their shoulders.
The only way to show that the renewal assumptions are
genuine is through documented portfolio plans that result
from sound planning processes. Issues that affect the size and
composition of the company real estate portfolio (relocations,
consolidations, outsourcing of manufacturing and business
processes, alternative workplace strategies, shift to on-
Figure 5: Estimated balance sheet impact for selected
major companies
Walgreen $35.0 B
CVS 27.0 B
Wal-Mart 13.1 B
McDonald’s 10.4 B
Home Depot 8.5 B
Kroger 7.0 B
A sampling of Retail and Service companies
Hewlett-Packard $3.4 B
Google 2.5 B
Microsoft 2.4 B
IBM 1.5 B
Cisco 1.4 B
A sampling of “Tech” companies
Future operating lease obligations to go on
balance sheets
6. 6 The New Lease Accounting Standard and You
line retailing, etc.) will need to be addressed in the light
of the new lease accounting standard. Longer-term planning
decisions, that were often neglected in the past, may be
required to comply with the new rules.
Own-vs.-lease
A key strategic issue that needs to be revisited as a result
of the new lease accounting standard is the own-vs.-lease
question. Companies that have avoided property ownership in
order to keep assets off of the balance sheet, will need to
remove this consideration from the decision making process
since all leases will now end up on the balance sheet.
It is true that no change will be necessary for companies
that base own-vs.-lease strategy solely on economics as
represented by projected cash flows. Few companies, though,
totally ignore the financial statement impact of large own-
vs.-lease decisions, and so most will have to readdress this
question based on the proposed lease accounting standard.
Lease Duration
Decisions regarding lease term may also need to be reevaluated
as a result of the new lease accounting standard. For example,
in today’s “Tenants’ Market”, relatively low rental rates
provide an incentive for tenants to sign long-term leases in
order to lock in low rental rates. The new lease accounting
rules discourage long leases since, all else being equal,
a longer lease will generate a higher initial P&L expense
than a shorter lease. And while the expense will gradually
decrease and eventually be lower than the rent expense
under current accounting rules, company decision-making is
often biased towards improved short-term results. The lease
term, therefore, takes on new importance with the new lease
accounting rules.
Managing budget challenges
Once the new lease accounting standard are implemented,
companies will experience an increase in aggregate lease-
related expenses. This increase is likely to continue for
a number of years until a large part of the portfolio is
renewed. Corporate real estate departments are going to find
themselves with a difficult budget challenge. The size of the
challenge depends upon the structure of lease expirations in
the portfolio, but most companies will experience an increase
in lease-associated expenses of between 5% and 10% (see
Figure 6).
Those with budget responsibilities will spend a lot of time
reconciling the new required real estate budgets to the old
budget and explaining to what extent the budget increase is
due to the new accounting. Executive management may also
request that real estate savings be identified to offset the
lease-accounting induced expense increases.
Communicating to those affected
The new lease accounting standard will affect many groups in
the corporation beyond the real estate group. The corporate
real estate group will likely be expected to identify who will
be affected and educate each group on the changes and
potential effects of the new lease accounting standard. The
affected parties will include people such as business unit
leaders who may see their real estate charge-backs increase
and treasury managers who will have to explain the company’s
deteriorating financial statement metrics to debt-holders.
The scale of the communication program required should not
be underestimated.
Ensuring compliance
Of all the new responsibilities arising from the new accounting
standard, compliance may be the most time-consuming and
daunting. Initially, the effort required to comply with the new
standard will be huge. Corporate real estate departments will
face additional pressures:
▪▪ Ensure all relevant lease data is collected and is accurate
▪▪ Create and maintain sound assumptions about lease
renewals, rental rates, contingent rentals, etc.
▪▪ Create and maintain processes to collect lease data and
assumptions
▪▪ Manage the various steps required to properly add leases
into the financial statements
Figure 6: Budget challenge for existing leases
Remaining
Lease Term
Present
Accounting
– Rent
Expense
New Accounting
– Interest and
Depreciation
Expense
Percentage
Increase
1 year $1,000 $1,000 0.0%
2 year 1,000 1,027 2.7%
3 year 1,000 1,051 5.1%
4 year 1,000 1,074 7.4%
5 year 1,000 1,095 9.5%
6 year 1,000 1,115 11.5%
7 year 1,000 1,132 13.2%
8 year 1,000 1,149 14.9%
9 year 1,000 1,164 16.4%
10 year 1,000 1,178 17.8%
15 year 1,000 1,230 23.0%
The budget challenge:
Increase in P&L expense in first year of new accounting
7. 7 The New Lease Accounting Standard and You
▪▪ Automate processes where possible with technology
Lease Data
With the new lease accounting rules, real estate departments
will need processes and tools to improve the completeness
and accuracy of lease data collected. Large companies with
worldwide operations and/or autonomous business units will
have an especially difficult time in verifying that the lease
inventory is complete. Companies must collect accurate
information for each and every lease in the company’s real
estate portfolio.
Key lease data to collect and manage:
▪▪ Fixed rental obligation
▪▪ Contingent rental terms
▪▪ Lease start date and expiration date
▪▪ Structure of utility and CAM charges
▪▪ Terms of options
Assumptions
Under the new lease accounting rules, a series of assumptions
must be made in order to properly account for leases. The
assumption with the largest impact on lease obligation
value will usually be the likelihood of renewing, canceling,
contracting and/or expanding leases based on a contractual
or legal right. These assumptions will become extremely
important. Take, for example, a two year lease with an option
to renew for ten additional years. The value of the lease
obligation added to the balance sheet will be roughly six
times more if renewal is assumed versus an assumption that
the lease will expire in two years. Also, by assuming that the
lease will be renewed, the first year P&L lease expense would
increase by roughly 20%.
In addition to likely lease term, there are other assumptions
that must be made. Assumptions about sales revenue may be
necessary for leases that have a contingent rent component.
And, assumptions about future market condition will be
necessary for leases with options to renew at a rental rate
associated to future market conditions.
Assumption-making will not be a one-time event. Assumptions
for each lease will have to be revisited and revised periodically.
As already noted, these assumptions will be scrutinized by both
executive management and auditors. Rigorous processes must
be established and followed to prove that lease assumptions
are sound.
Processes
Any processes created or revised to account for leases must
comply with provisions of Sarbanes-Oxley Act (SOX). In order
to become SOX compliant, processes must be documented and
tested prior to implementation within the business.
The lease accounting process can be broken down into five
sub-processes:
Sub-process #1: Collect and record lease information
The goal of this sub-process is to create a complete inventory
of leases and verify that all required lease information is
accurately recorded for use by other sub-processes.
Sub-process #2: Account for capital and impaired leases
Present accounting for capital leases and impaired leases that
are already on the balance sheet will need to be collated with
the lease inventory from sub-process #1 to make sure that
these leases are not double-counted.
Sub-process #3: Make necessary lease-assumptions
Determining lease assumptions may require the involvement
of different groups within the company beyond the real estate
and finance groups. For example, business managers may be
integral to make sound assumptions about the likelihood of
exercising renewal rights for a given lease.
Sub-process #4: Financial projections and calculations
Based on the information and assumptions made available
in the previous three sub-processes, the next step in the
lease accounting process is to calculate the present value of
each lease obligation and create the amortization schedule
necessary to account for the lease liability.
Sub-process #5: Make accounting entries
The final step in the lease accounting process is to enter data
into the financial accounting system. Companies will need to
invest a significant amount of manpower and talent to design
a lease accounting process. Companies will be challenged to
design a process that will allow information to move accurately
and efficiently from one sub-process to the next.
The effort required to design the process will be large.
While some sub-processes might be outsourced, selecting an
outsourced provider should be done carefully. Any outsourced
provider selected will need internal processes that comply
with Sarbanes-Oxley.
Technology
The scale of the lease accounting process will be large. Whether
for a large company with 1,000 leases or a small enterprise
with 10 leases, the lease accounting process is likely to be
large relative to the size of the company. Automating specific
steps and tasks will be necessary to improve accuracy and
productivity. New or enhanced software and IT systems will be
required. These systems should be scalable to accommodate
growth, flexible to accommodate changes, globally accessible
for data entry and access, and integrated with the company’s
financial accounting system.
The resources of the IT department will be called upon to
help select and implement systems. The required IT resources
might be substantial, especially in the early design phases of
the process.
8. 8 The New Lease Accounting Standard and You
The leadership challenge
Complying with the new lease accounting standard will require
a concerted effort spanning the organizational boundaries of
the real estate, finance, accounting, IT and business managers.
Leaders within these functions are needed to take on the lease
accounting challenge together.
“Seat at the table”
Those involved in corporate real estate often talk about
gaining a “seat at the table” with key decision makers within
the company. The new lease accounting standard will open
the door to talk strategy with the CEO, cost structure with the
CFO, budgets with business leaders and SOX-compliance with
the controller.
All those involved in corporate real estate, from financial
analysts to the top real estate executives, will find themselves
much more visible, much more respected and much more
valued. Of course, with increased visibility comes increased
performance scrutiny. But, for many the rewards will outweigh
the risks.
Part 5: What You Should Do Next
Your First Steps
There are a number of things that companies should do in the
near term to prepare for the new lease accounting standard.
Assign point people
Each function heavily involved in managing or accounting
for leases should assign a point person to lead the
company’s response to the new accounting rules. The point
person from each group should work collaboratively to
create a work program and timeline to address the various
implications of the new lease accounting standard.
Assess inventory of leases
Companies should assess the completeness of their lease
inventory. The real estate group should work with business
units and other functions to identify missing leases and add
them to the inventory.
Identify information gaps
Companies should review the structure of information
in the lease databases and gauge to whether more date
points are needed to in order to comply with the new lease
accounting standard.
Identify process gaps
In order to determine what additional processes are
needed and what processes are likely to be most difficult,
companies should review existing processes used to:
record lease information, prepare real estate plans, and
make accounting entries for leases.
Figure 7: View of overall process
Overall process required to comply with standard
9. 9 The New Lease Accounting Standard and You
Create decision-making tools
Companies should create decision-making tools to help
evaluate decisions such as lease-vs.-own and lease length.
As mentioned earlier, leases signed prior to the Effective
Date will probably not be grandfathered and will be added
to the balance sheet once the new lease accounting
standard is implemented.
Already urgent
While the new lease accounting standard is not yet finalized,
companies should prepare for the new rules now. There
are two reasons why early preparation is important. First,
companies should already be evaluating real estate decisions
through the lens of the new lease accounting standard. There
will likely be no grandfathering of leases signed prior to the
Effective Date.
Second, companies will need significant time to implement
the processes, systems and workforce required to comply with
the new standard. Companies will need to design and test
processes; integrate new technology into existing systems;
and hire and train people. Resources need to be budgeted
and procured now. Competition for resources will only become
more competitive as the Effective Date of the new accounting
standard grows closer.
Managing the implications of the new lease accounting
standard will create a significant challenge and companies
will require time to understand, evaluate and resolve issues
with the new rules. Companies that begin to prepare for the
new lease accounting standard today will be well prepared to
address the inevitable issues that the new lease accounting
standard will present.
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6720 Via Austi Parkway, Suite 500, Las Vegas, NV 89119
(888) TRIRIGA
(702) 932-4444
contact@tririga.com
www.tririga.com