CRE technology professionals wear a number of hats. My last post on this site addressed how CRE technology professionals can support their organizations’ M&As. Here, I’ll delve into how we can support industry governance — the hot issue on this topic right now is FASB/IASB requirements.
If you are not familiar with these requirements, you are not alone. In fact, several months ago I attended a software users’ conference where one of the sessions focused on the proposed FASB/IASB requirements. The speaker asked how many people in the room of about 150 attendees had started to plan for implementing these changes first proposed in 2013. Less than 10 people raised their hands. A voice from the audience said, “How do we know these new requirements will be approved and why should we plan for something that may not happen?” Clearly, the majority of those in attendance were comfortable with a reactionary approach to what was to come.
As the speaker addressed the question, the impact of the proposed FASB changes took hold of the audience like a tsunami approaching the shore. For nearly all the attendees, the full impact of these changes was a new topic introduced that day.
Leases and the associated cost of borrowing would now be accounted for on the balance sheet. In some cases, the balance sheet could become much weaker than previously presented — even though actual expenses have not changed. A weakened balance sheet could also have the potential of increasing the cost of the company’s overall borrowing in the future. Will these proposed changes increase the tendency for lease terms to be shortened? Will shorter lease terms affect the value of the leased property, whether it be real estate or equipment? Will the cost of leasing likely go up — or down?
While there is still much to be addressed, CRE technology professionals can support their organization by ensuring that their information management strategy is providing accurate and “real-time” data; a cohesive data analytics platform that can be accessed – and shared – by all business functions for optimal decision-making.
What’s next? The next steps outlined by the FASB Board at the November 2015 meeting included directing staff to draft a final version of the Accounting Standards Update for formal vote by written ballot. The effective date of the final leases standard for public business entities will be for fiscal years starting after December 15, 2018, and for all other entities for fiscal years beginning after December 15, 2019. Once the final standard is issued, early application of the change will be permitted for all entities.
Here’s a short review of the issue and most recent actions:
• FASB’s stated purpose of these changes and published in their recent Project Update on November 19, 2015 is “to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements.” This action follows a recommendation from the U.S. Securities and Exchange Commission (SEC) in 2005 on the topic of transparency in a report issued to address off-balance sheet activities. The proposed change addresses leases of more than 12 months and will apply to both lessees and lessors. The most recent meeting of the FASB Board addressed the effective date of the change, their consideration of the costs and benefits associated with it, and remaining economic life lease classification criterion.
• After analysis and review of costs related to the changes to GAAP and the perceived benefits, FASB’s Board concluded the benefits justify the proposed change. The Board also decided to provide for an exception to the lease classification test where the lease term criterion will not apply for leases that commence “at or near the end” of the economic life of the asset, with a reasonable approach deemed to be where a lease commences in the final 25 percent of the asset’s economic life. Where there is a change in the lease term or a lease option purchase assessment, FASB will also require a reassessment of the lease classification.
• Where FASB and IASB differ. FASB elected to take a dual approach for lessee accounting, where lease classification is defined in the existing lease requirements — is it an installment sale or an operating lease? The IASB is taking a single approach to lessee accounting, where all leases would be considered finance leases. FASB will retain for the most part the Qualitative Disclosure Requirements proposed in the 2013 ED, while IASB will require the lessee to provide additional information and will provide a list of specific disclosure objectives and examples to assist the lessee with compliance guidance. On Quantitative Disclosure Requirements, the two groups also differed on several items, but both agreed not to require a lessee to disclose a reconciliation of the opening and closing balances of its lease liabilities. (For more information, please visit the FASB website.)
The implementation of these changes will require effective planning, communication and collaboration between finance and accounting, IT functions, operations, and much more. While 2018 may seem far into the future, preparation needs to starts soon to make strategic decisions that will guide the implementation and the impact to the financial health of the organization. How well the change is managed will help identify new leaders who demonstrate their ability to adjust to a changing environment and provide critical leadership that engages the entire organization.
Note: This post is for informational purposes only; to learn more about FASB/IASB requirements, go to www.fasb.org.
Stanley is the CEO of Open Standards Consortium for Real Estate (OSCRE International), a membership-based, not-for-profit organization committed to the collaborative development and implementation of global real estate information standards.