FASB Lease Accounting Standard Changes

NEW YORK CITY—The new FASB lease accounting standard changes the way companies organize and report lease information, requiring both public and private firms to report their leased assets, including real estate, on their balance sheets. They must also recognize the assets and liabilities for leases with terms of more than 12 months. Public companies were expected to be compliant by January 2019 and private companies by January 2020.

Implementing this within an organization requires a large amount of planning and coordination across operating and financial teams. In addition to a reliable software solution, timing is incredibly important. Collecting and validating data to become compliant will be an arduous process.

The New York Chapter of CoreNet Global, an organization for corporate real estate professionals, regularly addresses topics surrounding the changing environment of real estate in its event programming. To further explore some of the main questions, I caught up with Jessica Epstein, a project manager at Hearst who is heading up their Lease Administration and Lease Accounting Project.

Dunaway: When should a company start preparing for the accounting standard changes?

Epstein: If you’re a public company and have not begun the process, you should do so immediately. If you’re a private company, the earlier, the better. It takes time to understand the policy and the platform even before the lengthy accounting process. At Hearst, we began planning a year and a half ago.

Dunaway: What are the first steps involved?

Epstein: First, you need to choose a software solution that can hold lease information and use this information to generate accurate calculations and journal entries for the new guidelines. Figure out how many records you have and what else you want the database to do—manage the leases, run alerts, connect to the ERP system, etc. If you already have a platform with a module to address the changes, you may be in luck.

To ease the burden of adopting the new standards, FASB set forth practical expedients to accommodate firms. Your financial team must become familiar with the new standard and determine if they want to take any of the expedients. This will affect the kind of data needed to drive the calculations and reporting.

It is vital that Operations Real Estate and Finance are involved from the start. While most of the data are in the leases themselves, some information will be needed from your finance team.

Dunaway: What are the requirements for a lease administration platform?

Epstein: That depends. The current driver for adopting a lease administration platform is the FASB requirements, but there can be many reasons to use a platform. Everyone can benefit from data stored in the system, especially if it is easy to report on. Consider who in your company is going to use the platform and how. To choose a database, determine how many users you will have and at what level of expertise you will need to train them. Each department that touches leases should be consulted for their specific needs.

Be wary of a system that is built with proprietary infrastructure. It can be difficult for training and ongoing maintenance. Look for systems that are constantly investing in their functionality and can adapt and scale with your company’s needs. Keep in mind that you aren’t just reporting real estate, but also equipment. The software should be able to accommodate both. Also remember that you’re purchasing support, training and a lifeline of resources for your team. Make sure you find a provider that you trust and fulfills your needs.

Dunaway: What are the biggest challenges and concerns in preparing the database for reporting?

Epstein: The biggest challenge is collecting and maintaining the integrity of the data going into the platform. The terms and definitions need to have consistency among all departments. For example, does base rent mean the same thing to legal and finance? Everyone needs to be speaking the same language so that data collected is consistent.

Streamlining and maintaining the database depends in large part on the users. You need the database to be organically maintained by all of the users. Keep this in mind as you create the new multi-departmental policies and procedures. Preparation on the front end pays off in the long term.

Wanda Dunaway is a regional VP at Shaw Contract. Jessica Epstein is a project manager at Hearst. The views expressed in this article are the author’s and interviewee’s, not those of ALM Media’s Real Estate Group.