Finance and real estate executives are beginning to grapple with the enormous challenge of complying with thenew FASB and IFRS lease accounting standards, FASB ACS 842 and IFRS 16 respectively. One of the first steps to achieving compliance by the January 2019 deadline for public companies, is selecting technology to support the effort. There are two distinct paths that organizations may consider.
One approach is to manage FASB data, calculations, and reporting in the same system that is used for day-to-day management of real estate and equipment leases. The other is to use a standalone system for FASB calculations that sits between the lease management and accounting system. There are big advantages to the former approach.
Significant Issues with Stand-Alone FASB solutions:
- Business process complexity
- Duplicate data across platforms
- High frequency of reassessment triggers
- Data structure inconsistencies
- Technology integration challenges
- Multiple points of failure and responsibility
There are many operational day-to-day events that occur inside and outside of a lease agreement that will trigger a revision of the FASB/IFRS schedule. These events include:
- Change in term including commencement or expiration dates
- Significant change in original lease, for example, a change in space
- Execution of an option including terminations, kick-outs, or renewals
- Change in the probability of executing options,
- Change in amount of a FASB-related charge after initial period
- Change in the dates of a FASB-related charge
- Receipt of TIA payments
- Impairment costs
Because these types of events happen frequently over the life of a lease, and because they are typically managed in the lease administration system, using an integrated lease management and FASB/IFRS approach eliminates the risk that a revision trigger will be missed or that the systems will become out of sync. If a standalone solution is used, real-time integration would be necessary to ensure accurate and timely information.
The way data is structured in the lease management system is also an important consideration. Each lease administration solution has a unique way of structuring properties, suites, spaces, and leases. The location of data needed to make an accurate classification decision for each lease along with the associated financial information will vary from system to system. This makes integrating a lease management solution with software that only performs FASB calculations a significant challenge. A single solution eliminates the chance of an integration error or missing data.
Organizations with a lease management system that supports the new FASB and IFRS standards should look to it as the first choice for compliance. Those without a lease management solution should begin the selection process now, keeping in mind that without an integrated approach to lease management and FASB/IFRS compliance there is a very real risk of producing an incorrect balance sheet.