Organizational Challenges & the New Lease Accounting Standards
There are many organizational models that are used to manage corporate real estate. Companies adopt primarily two models: centralized and decentralized. In this article, we’ll explore the differences and how they impact your organization’s ability to transition to the new lease accounting standards: FASB ASC 842 and IFRS 16.
Two common CRE organizational models
In the decentralized model, typically the business units handle all the primary functions of the corporate real estate function to include leasing, design, construction, facilities management, lease administration, etc. The decentralized model is popular with large diverse organizations that prefer to control all the key disciplines of the real estate function at the unit level.
The centralized model serves as the real estate support staff for all the business units. This model is popular with homogeneous companies with a singular service or product offering. Major accounting firms and banks are typically organized with a centralized corporate real estate function serving all the lines of business.
Major challenges of implementing the new lease accounting standards
Now consider the major tasks needed to implement the new lease accounting standards with respect to these two organizational models. The first step is assembling and organizing the lease portfolio data. Invariably this task will be a challenge when leases are scattered throughout the business units. Just getting the leases assembled and organized will be an administrative nightmare. And there will be the issue of consistency across unit portfolios.
Which organizational model is better equipped to manage the transition to the new lease accounting standards?
The centralized corporate real estate organization has the advantage of uniformity and consistency in the real estate file, making the task of conversion to the new lease accounting standards significantly easier. The centralized group has the advantage of familiarity with the portfolio and can retrieve files and data readily. The centralized group also has the benefit of having worked with corporate finance, legal, and accounting; and thus these relationships will work to make the conversion process more efficient.
The centralized group also has more direct access to senior management, and can resolve issues of lease strategy, balance sheet effects, and other issues that surface during the transition process.
From my experience the greatest impediment to a company wide change is effective communication. The centralized group is typically more unified and enjoys smoother communication processes than a decentralized group that must cope with different personalities, unit culture, and differences in approach.
Most decentralized real estate organizations will most likely form a multi-unit task force with representatives from each of the unit real estate groups chartered to gather and organize the lease files from each of the units.
Creating a task force to execute the new lease accounting standards
Despite the organization models and their respective challenges, it’s likely that a multi-discipline team will be formed to manage and execute the transition process. Most likely the task force will create a separate lease database and create in essence a “parallel universe” that will have all the specific calculations and values prescribed by the new lease accounting standards.
The advantage of this approach will be minimizing disruption to ongoing operations. This approach will require a high level of cooperation and collaboration from the real estate staff(s). From my experience it’s a best practice to appoint a senior manager to lead such a task force, and have the leader report to a fairly high level in the corporate structure.
The task force should include a representative from corporate accounting, corporate finance, and also include external specialists such as representatives from the accounting firm supporting the organization’s annual audit.