Partners in property: Why new lease accounting rules will force real estate and finance to work together

To comply with new lease accounting standards governing leases, businesses’ real estate and finance functions will need to collaborate via property management technology.

One former chairman of the International Accounting Standards board used to joke that his ambition was to one day fly in a plane that actually existed on the airline’s balance sheet. The point being that assets leased rather than owned by a business have never had to be included in such accounting, even though they may constitute substantial liabilities.

Until now that is. New regulation due to come into force in January 2019 will require all publicly-listed companies to include the value of their leasing obligations in their annual statements of assets and liabilities – and for most companies the biggest impact is going to come from their portfolios of real estate.

The rules, contained in the IASB’s IFRS 16 standard (and the Topic 842 regulation from the Financial Accounting Standards Board in the US), are set to have a huge effect on the publicly-declared state of the finances at many companies – particularly larger retailers and hoteliers that may have huge estates of leased properties.

Given the significance of the changes to come – the new lease accounting standard, by some estimates, will bring $2.8trn worth of assets on to company balance sheets globally – it’s not surprising that finance departments are beginning to get nervous. But when it comes to the business’s property leases, do they have a handle on their exposures?

The short answer at many companies is likely to be no. Property leases, understandably, have until now been almost entirely the domain of the real estate function, with finance paying relatively little attention.

So can the task of preparing for IFRS 16 be left to the business’s real estate professionals? Again, the answer is pretty obvious; even the most experienced property teams are unlikely to have the accounting expertise necessary to manage compliance in the right way by themselves. And even if they do, finance will need to consider the effects of lease accounting in the context of the business’ balance sheet.

Instead, a joint approach is now required. That will require businesses’ real estate and finance functions to work together more closely than ever before; there will also be a crucial role for better property management technology.

Essentially, complying with IFRS 16 is going to be a three-stage process. Businesses will need first to identify and consolidate all their relevant lease files; then they’ll need to work out which of the leases are caught by the new standards (some short-term leases won’t be); finally, they’ll need to bring all economically relevant data points onto the balance sheet.

It’s likely that the real estate function will do the lion’s share of the work involved with the first of those tasks, while the second job looks more like a joint effort and the final stage is going to see finance take the lead. But neither side is going to be able to do any of this work effectively without collaborating with the other.

The ideal scenario is that the business’s real estate team talks to finance right now about the data that’s going to be required. It can then consider whether its current property management technology is up to the job of generating all of the data required – and, if not, what the alternatives might be.

With the right technology in place, the process can be very smooth. Real estate will ensure its systems are capable of delivering all the information that finance requires to meet its accounting obligations from January 2019 onwards; and when the standard kicks in, all relevant information will already be flowing between the two functions.

Without a closer working relationship, however, the scope for confusion and, potentially, non-compliance is frightening.

Takeaways:

• New lease accounting standards that come into force in 2019 will require companies to record the value of real estate leases on their balance sheets
• Both real estate and finance will need to work together to deliver compliance under the new standards
• Property management technology can help real estate provide finance with the key data and information required
• By working more closely together, real estate and finance can take a strategic approach to future lease design

For more information on our lease accounting solution, please visit the IFRS 16 page.