Changes are coming — is your organization ready?
The Financial Accounting Standards Board (FASB) is gearing up to align U.S. standards with global accounting standards, increasing transparency in financial reporting and altering the way organizations account for their leases. For many organizations, adherence to these new FASB lease accounting changes (ASC 842) or IASB changes (IFRS 16) also creates a greater compliance burden.
While the liability of adopting new FASB lease accounting changes technically falls onto accounting, the accounting department is not in it alone. Organizations will need to rely on other stakeholders — real estate, procurement and IT departments — to help implement the changes and stay in compliance. By including other stakeholders early in the planning process, your organization will be better prepared for a seamless transition.
Start by lining up key players to collaborate with your accounting department to achieve and ensure compliance with FASB lease accounting changes.
In addition to the right people, you need the right system. Find out 7 things to consider before choosing a lease accounting system.
Real estate: Your first touchpoint for FASB lease accounting changes
With the FASB lease accounting changes, there’s a shift happening and real estate figures are hitting the balance sheet. The real estate department, historically in charge of managing and administering those numbers, is a critical source when it comes to identifying your leases and related data.
The FASB new lease standard will require your organization to provide more data regarding its real estate, so it makes sense that the department should understand what’s needed, why it’s needed and how to make sure it’s done correctly. While real estate might hyper-focus on site selection and facilities management, your accounting department can do their part to make their colleagues more adept on the deeper financial and accounting aspects of real estate. Ultimately, they will have a hand in using, and possibly even managing, the lease accounting system.
Your real estate department should also know, at a high level, what’s happening from an operating versus capital lease shift perspective and how it is driving a digitization of leases into the financial realm. In an operating lease, the real estate team signs and manages all the leases before the expenses are pushed over to the accounts payable team each month to pay the bills. They never actually hit the balance sheet that accounting manages. So now as we shift into capital leases, the data will go straight onto the balance sheet, bringing accounting into the fold.
In addition, real estate can provide accounting with guidance and input on different renewal options, how they look or what would work best. Accounting sees the whole portfolio in terms of numbers. But how will that roll into the balance sheet with the new FASB lease accounting changes? From equipment to facilities to real estate, they’re focusing on these elements as data points. But real estate can provide a new perspective on how real estate leases function and offer missing information that hasn’t previously been tracked.
While there may be substantially fewer real estate leases compared to equipment, in terms of risk and obligation, real estate might represent half of the expenses in your leased portfolio. Financially, there is now a need for a working partnership between accounting and real estate because of the FASB lease accounting changes.
Procurement: An extra set of eyes
Whether you’re an accounting executive, a product manager or a salesperson, your priority is your day-to-day tasks. So, if you need a new vendor or a new service, the procurement team is there to assist. Procurement helps evaluate and qualify different vendors as well as the related costs. They guide everyone through the process right down to the signature. In many cases, they’re comparable to a project manager, bringing various teams together to help them make a decision. They help to drive the process or run a project. And they also play an important role in readiness for FASB lease accounting changes.
Many procurement teams are involved in the existing asset management, whether that’s real estate, office equipment, IT items or maybe even fleet. Chances are, at some point they’ve adopted a system to track and manage those fixed assets. It could be a very basic spreadsheet that’s tracking your fifty property leases and their terms. This is an area where you would want procurement’s involvement with accounting. They have visibility that your accounting team may lack into the other assets or other successes across the portfolio.
And with an eye on organization and detail, the procurement team may notice an overlap in a lease management and lease accounting projects. Their input can prove to be valuable in terms of ensuring compliance with FASB lease accounting changes.
IT: The glue that makes everything stick
It is easy to overlook the fact that real estate is just looking at real estate, accounting is just considering the balance sheets, and procurement is focused on asset management. But the IT department holds all those pieces together. IT is thinking through the components, databases and spreadsheets. How do we get this information to the accounting system? How do we map it to our current cost center’s expense codes so that every single vendor has a pay code attached to it?
IT understands systems integration. It is IT’s job to ensure that data flows from the source of record — the lease management — to a lease accounting system such as an ERP system. They are heavily invested in how the integration works, investigating all avenues and overseeing a seamless connection.
IT is an essential piece of tracking, storing and moving critical data. And with IT handling the back-end details, you’ve assembled a well-rounded team to adhere to the FASB new lease accounting rules.
Ready? Set. Go!
With the FASB lease accounting changes on the horizon, it takes more than your accounting team to ensure that your organization can effectively integrate information, share data and comply with the new standards. By fostering early collaboration with real estate, procurement and IT, your accounting department can pave a smoother path to adopting the new standards and avoiding compliance penalties.