Until recently, Corporate Real Estate (CRE) and Accounting departments had little reason to talk to each other.
CRE is primarily responsible for obtaining space and managing facilities-related issues. The Accounting department’s job (related to real estate) has been to pay the bills and record the expenses in the ERP. Before FASB ASC 842 and IFRS 16, accounting for leased property assets was straightforward. And for most companies, there was little effort to manage the expenses associated with property assets; those were considered necessary costs of doing business. So there was not much for CRE and Accounting to talk about.
Because of the new lease accounting standards, that situation has changed dramatically in the past year. Companies must now account for leased assets and liabilities on their balance sheets. Real estate lease portfolios often represent many millions of dollars, and that value can have a big impact on financial statements.
Plus, the new lease accounting standards make leasing costs more visible, and companies are realizing how much money they stand to save by better managing real estate leases.
That’s why, as companies assemble their teams and work toward compliance with the new accounting standards, it’s critically important that Accounting and Real Estate teams work together.
What Accounting needs from Real Estate for lease accounting compliance
As a lease accounting and lease management technology provider, Visual Lease is often involved in the initial meetings as organizations begin planning for adopting the new standards. Because this process is new to them, many organizations make the mistake of thinking Accounting can manage it on their own. Many times, CRE is not even included in those early meetings.
The first thing that’s important to understand is how much time and effort it will take to gather all your lease data in one place. Few organizations have a central repository for lease information. Lease contracts are filed away in drawers, and lease data lives in spreadsheets on the computers of the people who manage those assets. Especially for a distributed organization, finding it all and centralizing lease data will be a big job.
To further complicate things, accounting for real estate leases under the new standards requires much more information about leases than was needed in the past: information that Accounting does not have access to. We’re not only talking about the details of lease contracts, but also information about property decisions, such as whether or not leases are likely to be renewed at the end of the term.
This information can only come from the CRE team. That’s why Accounting will need the help of the keepers of real estate lease data and the decision makers, to achieve compliance with the new standards.
And there’s more: getting compliant is not a one-and-done exercise. Real estate leases change often: they are revised, renewed, and canceled as the space needs of the business change. Payment amounts for rent and maintenance may also change over time. Every time that happens, Accounting must update journal entries and balance sheets. So organizations need to set up processes for CRE to keep Accounting in sync with lease changes that impact financial reporting.
What CRE gains from working with Accounting on compliance
As Accounting teams begin to understand the magnitude of the effort required to collect and report on lease data (especially for complex real estate leases), they reach out to CRE for help.
At first, lease accounting data collection may seem like a burden on the CRE team. However, it’s important to realize that this is an opportunity for CRE to “gain a seat at the table,” become a more valued part of the organization, and demonstrate to the C-suite that their work is directly tied to business performance.
As I mentioned, the new lease accounting standards make real estate leases much more visible financially, and therefore a higher priority for the organization. Real estate lease information will now be needed for business planning and forecasting, and will affect not only the books but also things like debt covenants and borrowing capabilities. Suddenly, CRE has important expertise, control over critical assets and essential data, and their decisions have a much larger financial impact than ever before.
And, due to the complexity of the new lease accounting standards, almost every organization with more than a few leases will need a central repository for lease data and software to perform calculations. Some software platforms, like Visual Lease, include tools that help manage leases and optimize lease expenses.
So, that puts CRE in a position to become real heroes: they will have the data, the tools, and the status to drive process and policy changes that save the organization millions of dollars.
How will organizational relationships evolve after FASB compliance?
At the very least, Accounting and Real Estate teams will communicate and collaborate more effectively during and after implementing the new lease standards.
For example, we’re seeing two different strategies emerge for sharing the responsibility for lease accounting calculations between Accounting and Real Estate:
- Real Estate is responsible for collecting raw data (including details about options and other decisions) and generating the necessary lease accounting calculations. The Accounting team has the ultimate responsibility for financial reporting, so they must vet the numbers from Real Estate and use them to create the journal entries that feed reports.
- Real Estate collects only the raw data and passes that to Accounting to perform the calculations and create journal entries. In that case, Accounting will need to work closely with Real Estate to make sure the data is complete and broken down into the level of detail needed for calculations.
Changes in responsibility are also leading to changes in the organization’s reporting structure, with more Real Estate teams now reporting into the CFO’s office. That’s happening because Financial leaders want more visibility and involvement in Real Estate decisions. It’s not only lease-or-buy decisions that are important, but also choices about lease length and the availability and structure of lease options. When the two groups work more closely together, Accounting can calculate the financial impact of various alternatives before the decisions are made.
Instead of moving Real Estate into the Accounting department, some organizations may choose instead to handle decision making related to property leases, including negotiating the leases, through the Finance and Legal departments. In this scenario, Real Estate will keep only the responsibility for facilities management tasks, and in companies where this is an important focus, for culture and employee experience.
Either way, it seems likely that the new lease accounting standards will drive changes in skill sets, responsibilities, and collaboration between the CRE and Accounting teams.