Between now and 2019, new accounting standards from the Financial Accounting Standards Board (FASB) require companies to cite their corporate leases of 12 months or more on their balance sheets.
In the past, companies were able to list their building and equipment leases as operating expenses. Now, in an effort to be more transparent, these companies will be required to include their leases as line items.
Previously announced in 2016, these new lease accounting standards are meant to improve transparency among U.S. companies and businesses that lease properties and resources. In the end, potential investors and other financial parties will ideally be able to identify and easily understand the liabilities and commitments these leases pose.
The new lease accounting standards also create some hurdles for companies. Because leases will now be entered as a line item on a company’s budget, the reported debt will likely rise for many companies.
Despite some of the challenges the new standards present for businesses, it also creates a unique opportunity for them to make well-informed real estate decisions.
How Your Company Can Prepare
Companies must ask the right questions in order to comply with the FASB’s new standards and to make sure they’re structuring the best lease for their needs. These questions may include:
- Would a shorter-term lease lessen the financial impact on our balance sheet?
- What kind of lease terms would minimize balance sheet impact or improve EBITDA?
- Under what circumstances does ownership make more sense than leasing?
- How will we address the increased scrutiny and administrative burdens of compliance?
The answers you receive may be information overload, but with the right approach and a strong strategy your company can benefit from their lease and avoid the penalties of non-compliance.
We’ve outlined five of the most important steps to take to prepare for these new lease accounting standards to set companies up for success:
1. Establish Your Team.
These lease accounting changes are more than just a “real estate” or “accounting” issue. Companies must break down the silos and collaborate with multiple departments, ranging from IT to investor relations and all the way up to the C-suite. Working in collaboration with all areas of the company ensures all requirements are met from all departments.
2. Take Inventory.
For companies dealing with multiple leases, consider implementing a lease inventory complete with lease details such as terms and costs.
3. Perform a Gap Analysis.
It’s important to identify where your gaps are before you begin reporting. Identify where your resources are, analyze your data and create a plan to cover the gaps so your reporting is as buttoned-up as possible.
4. Assess Financial Implications.
Perhaps one of the most important steps, evaluate how your current leases will impact the financial performance of your company. Include costs that are important from all stakeholder points of view, including profit-and-loss statements, financial ratios and loan covenants after the rules go into effect.
Finally, reassess the methodology used for making commercial real estate decisions. Work with your internal and external team to develop an updated management plan to highlight the pros and cons of your current lease, and areas that can be improved moving forward under the new standards.
Preparing for the FASB’s new lease accounting standards is an overwhelming task, but one that should be done effectively. To determine your level of preparedness and provide a custom road map for compliance, consider taking our free online assessment, which will help guide you and your company toward strategic real estate decisions.
About the Authors
Jeff Karger is a Senior Vice President of Brokerage in JLL’s Grand Rapids office. Jeff has more than 15 years of both retail and office brokerage in the Western Michigan region. He is affiliated with the Michigan Association of Realtors and National Association of Realtors. Learn more about Jeff’s experience here.
Bob Horn is a Senior Vice President and Assistant Director for the Capital Markets group in JLL’s Grand Rapids office. Bob specializes in industrial brokerage and has successfully completed more than 13 million square feet of industrial transactions. He is affiliated with the Michigan Association of Realtors and the National Association of Realtors. Learn more about Bob’s experience here.