How FASB Changes Will and Won't Impact Leasing

Beatty: “The size and complexity of companies’ lease portfolios will determine the challenge of transitioning to the new standard.”

LOS ANGELES—“Not your typical accounting change” is how CBRE Group and PricewaterhouseCoopers describe the new US and international standards that will move most corporate leases onto the balance sheet. The two firms have conducted a study charting the coming impact of the Financial Accounting Standards Board’s version of the new rules, which take effect in 2019 for publicly traded companies. It finds that while most corporate real estate executives don’t expect much of an impact on their leasing strategies in terms of whether to lease or own, managing the leasing data is another matter. “The size and complexity of companies’ lease portfolios will determine the challenge of transitioning to the new standard,” says Jeff Beatty, senior managing director of CBRE’s financial consulting group and leader of the company’s Global Lease Accounting Task Force. “We believe that after companies formalize the process of gathering the relevant data, they will be surprised to find that they may have more leases than they originally thought.” Beatty emphasizes that the new standard “applies to all leases, not just real estate leases. Prudent companies will plan to put time on their side by at least starting the transition process in 2016.” According to the survey conducted by CBRE/PwC, and counter to some other recent studies, a “significant majority,” or 70%, expect to begin implementing the new standard this year. “This is a stark contrast to many companies that seemed to get off to a slow start in implementing the new revenue recognition accounting standard,” the study says. One likely reason for the more proactive approach on lease accounting is the challenge most executives expect to encounter. Seventy-five percent of executives surveyed said systems implementation issues will be “very” or “somewhat” difficult, and 73% said data collection will be “very” or “somewhat” difficult. These perceived difficulties stem from what the CBRE/PwC study defines as the current state of data management for corporate leases. “For companies with substantial leasing, spreadsheet-based accounting may not be practical”—although that’s the current standard at many companies, the report states. It cites the maintenance required and susceptibility to error as pitfalls. “For companies with significant lease portfolios, trying to adopt without system upgrades or integration could miss an opportunity to automate labor-intensive activities and free up valuable resources,” according to CBRE and PwC. “Many companies are still accounting for their leases of corporate real estate using spreadsheets and accounts payable systems with no formal corporate real estate asset management system for these leased properties.” The study notes further that companies that track leases on spreadsheets and manage leases in a decentralized manner may face significant challenges in gathering data. “Even for the more sophisticated corporate real estate groups that have asset management systems, these systems are often freestanding and utilized more for lease administration purposes, with no integration with the company’s accounting systems,” according to the study. “Having the right leasing data is critical in companies preparing for future implementation considerations and staging for integration with longer term solutions,” says Sheri Wyatt, managing director within PwC’s capital markets & accounting advisory services practice. “Organizations should take a measured, phased approach, starting with a current state assessment that focuses on lease inventory, accounting process, data and system capabilities, which will help yield the greatest value across their businesses.”