If you are like most of our customers, you are starting to think about how your organization will comply with the new FASB lease accounting standards. For a lot of the folks we talk to, it is starting to sink in that this change may double the balance sheet. There’s a lot to unpack about that.
You’ve likely heard from other software companies, perhaps even the auditors about software solutions that can perform the FASB 842 calculations for the new standard. That’s certainly a piece of the puzzle, but our clients who are well down the path to compliance have discovered that this is much more than a question of getting the math right.It’s kind of like TurboTax. There’s essentially no risk that it will make a calculation error, but that doesn’t mean that just anyone can use it to do your corporate taxes. Of course not. You need an expert who understands what to put into the calculator, or the results will be a mess that gets people fired.
The same is true of the FASB 842 lease changes situation. What our clients have realized is that there are six potential points of failure for which many companies are largely unprepared. They include:
Point of Failure #1: Gathering the Real Estate Data
A few of our clients made the early mistake of assuming that because they had all of their real estate data in an electronic system that they were all set for compliance. Turns out, however, that there are a couple of huge “got ya’s” when it comes to data. First, compliance will require lots of lease data that isn’t commonly abstracted today. Beyond that, much of the information needed to correctly classify and calculate leases isn’t even in the lease. Information like fair market value and whether options are likely to be renewed is probably not sitting in your lease admin system today.
Point of Failure #2: Equipment and Other Lease Types
Most of the discussion about the standards changes has been about real estate leases because, in most cases, that’s where the most of the balance sheet impact will come from. But some of our clients have found that most of the work will come from other types of leases like equipment and software. Often corporate finance teams handle real estate leasing, but equipment leases are done on a departmental level. The most common answer we get when we ask customers how many equipment leases they have is, “I have no idea.”
Point of Failure #3: Organizational Structure and Process
One question we get a lot is, “Is FASB 842 an accounting problem or a real estate one?” The answer is, “Yes.” Unfortunately, lots of companies have siloed organizations that don’t typically share information back and forth and don’t have good systems in place for doing so. Our clients who have been successful, have had to make shifts to roles and responsibilities and roll out technology designed to support this cross-functional challenge.
Point of Failure #4: Time
Any reasonably healthy person can ride a bike from New York to California if they have all of the time in the world. Twenty minutes a day will eventually get you there. But unfortunately, you don’t have the luxury of time in this case. We’ve heard from clients that they seriously miscalculated the amount of time required to get everything ready for compliance on Jan 1, 2019. There’s also the issue of look-back financials for 2018 and 2017 that a lot of folks did not account for.
Point of Failure #5: Future Impact
We’ve heard the FASB changes compared to the whole Y2K issue, but it turns out it is really quite different. Y2K was a “calculation” type problem, and once the digits were fixed, all was well. But financial reporting under the FASB guidelines isn’t a one-time event. What companies are realizing is that they need to review their lease negotiation and approval practices in order to minimize the balance sheet impact. The new standards may even change the lease vs. buy calculus. In some cases it may make sense to renegotiate existing leases, for example, leases that have service charges lumped in with base rent present more of a challenge than leases that have the charges separated.
Point of Failure #6: Technology
Obviously, there is a technology component to the issue, and there have been some lessons learned in that arena as well. Some vendors are pitching bolt-on FASB calculation software that sits between the lease administration system and the accounting system. This seems like an easy solution, but it actually introduces a significantly higher level of complexity than moving to a lease administration solution with FASB support built-in. This really comes down to the number of day-to-day lease events that will require revisions to the FASB schedules. A few of them include; a change in term, a change in space, execution of an option including terminations, kick-outs, or renewals, change in the amount of a FASB-related charge after the initial period, and receipt of TIA payments. This kind of stuff happens all the time, making syncing between disparate systems practically unmanageable.
So given all of this risk, how do organizations cope? Our clients have found that it is best not to go it alone. It makes sense. Your organization will only make this transition once. Our professional services team will do it hundreds of times. With our turn-key software and services solution, you can avoid the pitfalls that lead to delay, confusion, and unhappy auditors. If you are ready to start your journey, drop us a line.