In early 2016, the US Financial Accounting Standards Board (FASB) and the International Financial Accounting Standards Board (IASB) issued new lease standards, which require companies to include lease obligations in their balance sheets. The new standards take affect 1 January 2019 and will impact all companies that have leases for real estate or equipment and file financial statements…
For many years, IWMS software providers have provided real estate, leasing, and portfolio capabilities, which include modules that integrate details of leases and contracts with existing financial and accounting systems to provide a central database for real estate financial planning and analysis and to create the correct entries for the accounting system. The new FASB/IASB accounting standards bring the spotlight on the role of software in managing leases.
A review of the deals in the public domain shows that providers such as Accruent, Lucernex, and Qube are already swooping in on opportunities to help companies mitigate risk by ensuring compliance to these new leasing standards. In the last few months, Lucernex has announced several new contracts with retailers such as Bouclair, DXL, Bashas’ Family of Stores and Suburban Propane. Accruent has been selected by CTIL, Tillys and Sephora in just the last few weeks. We are also witnessing other IWMS vendors improving their capabilities for accurate lease calculations in accordance with the new lease accounting standards. For example, in April, Planon software received validation from a Big Four accounting firm that its leasing calculations engine was in accordance with the IASB/FASB requirements…
[Admin: This post is related to the 08.01.16 post about the competitors of IBM TRIRIGA. To see other related posts, use the FASB tag or IFRS tag.]
In principle, every organisation is made up of four production factors: the capital, the people who work there, technology, and information (data). The real estate manager’s role in the organisation is becoming steadily more significant, partly because of the disruptive changes in Corporate Real Estate. One might suggest that real estate can now be regarded as the fifth production factor. How does a real estate manager gain control over his biggest cost item: the real estate portfolio?
Striking a balance
As a new and fifth production factor, real estate plays an important role in your organisation. Did you know that Corporate Real Estate (CRE) represents on average around 20-25% of a balance sheet? That 60% of organisations lack transparency in their real estate portfolios? And that no fewer than 2 out of every 3 real estate managers lack control over their real-estate-related processes? It’s up to the real estate manager himself to make a positive change to these statistics, and to tackle the challenges that lie ahead…
The world is changing
From 1 January 2019, publicly listed companies are required to include on their balance sheets any rental contracts that run for longer than a year. With the introduction of the new lease accounting standards, the debt position on your balance sheet could rise by up to 20%. These new regulations therefore exercise a direct influence over your portfolio strategy. Accurate administration, reliable calculations and compliant reports are an absolute necessity. The need to regain control over your real estate will be made all the more urgent by the disruptive changes currently occurring in the world around us…
[Admin: To see other related posts, use the Planon tag or Leases tag.]
The impairment functionality should start as a comparison between the fair market value (FMV) as entered by the user in the Review Assumptions, and the current amortized cost basis of the right of use (ROU) asset for the selected fiscal line item (FLI) period (i.e. ROU asset value in the FLI for the corresponding fiscal period).
Currently, TRIRIGA is comparing the FMV as entered by the user in the Review Assumption, to the FMV as stored/displayed in the Accounting Summary section of the Accounting tab. The impairment should be triggered when the FMV as entered by the user is less than the ending ROU asset in the corresponding fiscal period.
We needed to fix the impairment comparison against the amortized cost (asset value) for the current and new lease accounting standards. Moving forward, the initial impairment calculation no longer compares with the existing fair market value (FMV). Instead, a change was made to compare against the amortized cost.
[Admin: To see other related posts, use the FMV tag or FLI tag.]
In the TRIRIGA 10.4.1 Lease > Accounting tab > Schedule Summary section, there is the “Total Rent Present Value” field. In 10.5.2, that field is no longer there, but there is the “Current NPV of Rent” field. What is the difference between the two? Why are they different?
I can’t reply to the specific changes, but since 10.4.1 was released in 2014 and 10.5.2 was released in late 2016, there were scenario enhancements and more scenarios covered in TRIRIGA for Lease Accounting in the releases in between. The Lease Accounting wiki has information about the changes in these releases and might be helpful for questions similar to this (i.e., what is the difference between releases)…
Looks like the difference between present value (PV) and net present value (NPV) is the “net”. The latter “net” basically accounts for the initial capital/investment. As for “why” the change, I’m not sure, but it might be a more useful or accurate value for newer lease calculations/standards…
Both represent the Net Present Value (NPV) for the Operating/Finance schedule. The field from 10.4.1 and 10.5.2 is the same, but the label has changed in 10.5.2. In 10.4.1, it represented the Net Present Value at the time of lease activation and was not updated even if there were review assumptions performed. In 10.5.2, after the new accounting standard finalized, the current NPV now represents the NPV (liability as it is known) either at the time of first activation of the lease, OR after any recalculations might have impacted it due to performing the review assumptions. For example, at the start, it might be $30,000 and 1 year later, the NPV changed to $21,000, due to review assumptions that represent the “current” values at that point. By comparison, in 10.4.1, it would always show as $30,000.
[Admin: This post is related to the 02.22.16 post about the latest information on lease accounting.]
The new FASB/IASB leasing standards have created ripples in the facilities industry with companies scrambling to achieve compliance before the 2019 deadline. Unfortunately, many of the organizations who fall under this statute do not have a streamlined lease administration process… Accounting and consulting firms have leveraged their technical expertise to guide companies in their path forward.
One such global audit, tax, and advisory firm elected to develop and market a hosted lease management tool to aid their clients in achieving FASB/IASB compliance… The firm selected IBM TRIRIGA for its extensive out-of-the-box capabilities, but wanted to add validations like specifications for when to review assumptions and to ensure accountability of balance sheet accuracy. The firm wanted to leverage the enhanced functionalities of the IBM TRIRIGA Real Estate Manager and selected ValuD as their strategic partner for implementation and development…
The leasing tool had to be adaptable to include future enhancements and had be deployed seamlessly to the firm’s customers. As a result, a hosted delivery model was chosen to ensure customers were on the latest release… The lease accounting tool was one of the first to be launched in the market exclusively for leasing standard compliance. The firm attracted new clients which created a new revenue stream. The firm’s clients achieved statutory compliance, gained better control over their lease portfolio and process efficiency, and improved security with the hosted model…
[Admin: To see other related posts, use the ValuD tag.]
There will be considerable change in lease accounting from 2019. That date will see new standards from the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) come into force. This also means that the roles of real estate and finance manager is also likely to change, as each will undoubtedly need the other to cope with the challenges of the new standards…
New tasks for the new standards
This will change a finance manager’s work. Leasing contracts, which previously might have been considered less important, will now play a larger role. That is because it’s no longer simply about what an organisation pays to a leasing company each month. The finance manager now has to incorporate on the balance sheet both the valuation of the liability and of the property. That presents quite a challenge. Whereas previously he could simply report on the costs of leasing contracts, now, to be compliant with the new standards, the finance manager must also report the value of these contracts as well as the underlying information.
On the other side of this is the real estate manager, and as 2019 looms, he also needs to give much more thought to the financial impact of leasing arrangements. No longer can he just mention the leasing costs of a set of premises, but rather, he must also state the impact of those costs on the profit and loss account and the balance sheet…
Collaboration is the key to success
In practice, real estate and finance are two separate worlds. Most real estate managers prefer not to immerse themselves in all the accounting rules. Finance, by contrast, has knowledge covering a whole gamut of legislation and regulations, of which real estate is only a small part. Having a “linking pin” would appear to be a way forward – someone who speaks the language of both the real estate and the finance manager. So it could be an interesting idea to hire someone with a completely new profile. Someone who knows about both real estate and finance…
[Admin: To see other related posts, use the Planon tag.]
From 1 January 2019, the new lease accounting regulations from the Financial Accounting Standards Board (FASB) and the International Accounting Standard Board (IASB) will need to be implemented in order to comply with the new standards, ASC 842 and IFRS 16 respectively. In this blog, I will share with you the important lease accounting changes and relevant terminology.
With effect from 1 January 2019, publicly listed companies will be required to include on their balance sheets all leasing contracts with a contract term longer than one year. This is a measure against an offensive strategy of sell-and-lease-back, also known as off-balance financing. It implies that organisations can free up financing, as leased properties – in contrast to owned properties – are not required to be included on the balance sheet. This strategy was used by many corporates during the 1990s and early 2000s. The key objective of the new standards are to enhance financial transparency in lease accounting administration…
The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB)… are convinced that actual lease liabilities should be reflected in a uniform way for readers of financial statements. Since 2006, FASB and IASB have been undertaking a review of their relevant lease-related chapters ASC 840 and IAS17 that cover lease accounting. By moving away from current accounting practice, financial transparency will be enhanced by showing off-balance lease financing, together with the related liabilities, on the balance sheet.
From 2019, the relevant compliance standards are ASC 842 (which replaces ASC 840) and IFRS 16 (which replaces IAS17). However, even though the new reporting requirements take effect from 2019, at that same time, organisations must comply retrospectively to ASC 842 and IFRS 16 for the years 2017 onwards. Therefore, it’s time to act now, as 2019 is fast approaching! In my next blog, I will elaborate on the steps that a Corporate Real Estate manager will have to take, working together with their CFO, in order to be ready in time for the new lease accounting regulations.
[Admin: This post is related to the 04.26.17 post by Planon about 3 steps to take to meet the 2019 deadline. To see other related posts, use the Planon tag.]