How the New Lease Accounting Standards Impact Your Company
Time to get those balance sheets in order.
Beginning next year, the new lease accounting standards set forth by the Financial Accounting Standards Board (FASB) will require organizations to be more transparent about their assets.
Real estate directors, CPAs and others responsible for managing property will be required to record all leases, assets and real estate as liabilities on their quarterly financial statements.
“The new guidance responds to requests from investors and other financial statement users for a more faithful representation of an organization’s leasing activities,” said FASB Chair Russell G. Golden in a news release. “It ends what the U.S. Securities and Exchange Commission and other stakeholders have identified as one of the largest forms of off-balance sheet accounting, while requiring more disclosures related to leasing transactions.”
The new standards take effect for public companies after Dec. 15, 2018, and for all other organizations after Dec. 15, 2019. Here’s what your company needs to know to prepare.
You’ll Need to Keep Track of Every Asset
Unless they have capital leases, most organizations record leases as rent expenses on income statements and in financial disclosures. The new standards will require them to list all lease assets as liabilities on their balance sheets. For instance, airlines now will need to list every plane and vehicle they don’t own. Manufacturers and others will need to include every machine and piece of equipment.
You’ll Need to Know Detailed Information About Each Lease
Organizations also will need to distinguish between service contracts and operating leases and keep track of the terms of the lease, as they are required to recognize leases with terms of more than 12 months, according to the AICPA.
The CEO Will Have Greater Accountability
The new regulations require lease information to be reported on quarterly financial statements. Although the CEO is ultimately held accountable for the accuracy of this information, the responsibilities almost certainly will trickle down to those who report to him or her. That may include the real estate director, analyst, controller or accountant.
You May Need to Rethink Your Approach to Lease Accounting
Lease information isn’t typically shared across an organization. It’s more often kept in several binders or spreadsheets and managed by one or two people. It may be spread across departments or individual buildings. This makes it very difficult to report on.
With the new standards requiring more detailed reporting soon, it’s a good time to evaluate your organization’s approach to lease accounting. If your lease information is scattered and siloed, consider moving it to a digital format. An integrated workplace management system (IWMS) that includes asset tracking software will allow you to keep track of all your organization’s equipment, from printers to heavy machinery. It will give you greater visibility into lease types and terms, making reporting much easier.
iOFFICE has partnered with Visual Lease to make lease accounting easier for real estate directors, accountants and others who will have greater reporting responsibilities with these new standards. Those in charge of managing leases can register each new property or asset, noting the type of lease, cost, payment frequency and landlord allowance. This information is used to generate quarterly reports that are emailed to the accounting team and can be easily presented to investors.
Because the information is integrated with our integrated workplace management system, facilities managers or others also can use it to make decisions about the most cost-effective and efficient ways to use their space and equipment. They can assess rentable square footage costs per employee, per building or per floor. They can review data from facility maintenance software to determine the true costs of leasing various assets and whether it’s worthwhile to continue the lease.
The new lease accounting standards will go into effect over the next two years whether your organization is ready for them or not. Instead of viewing them as an added burden, look at them as an opportunity to get a better handle on your lease accounting — and your operating expenses.
See how iOFFICE real estate and asset management software can help you keep track of your leased assets, and more. Contact us for a demo.