January 1, 2019.
That’s the date by which most corporations need to comply with updated regulations pertaining to the way leases are considered in accounting. This means there’s work to do—but there’s also a chance to discover opportunities for savings and increased efficiency. You probably already know about the deadline breathing down your neck; you may feel pressured to ensure your business is compliant before it hits. Knowing what can happen and how to avoid problems is the key to avoiding any kinks in your operations during the transition. The right integrated workplace management system (IWMS) might be all you need.
When the Financial Accounting Standards Board (FASB) updated its standards for lease accounting in February 2016, it capped a decades-long effort to get operating leases on the books. However, the update also introduced the possibility of gaps in lease accounting that could cause compliance problems. If you already use IBM TRIRIGA®, you’ll be in good shape, since its developers have been incorporating the upcoming changes since they were first announced. If not, it’s a great time to start.
How and When FASB Could Poke Holes in Compliance
If a lease is deemed to be subject to FASB under the new guidelines, that lease is considered capital and must be amortized as if you owned it.
If you’ve already updated your systems to incorporate the changes, you’re set. If not, you need to do so, and quickly. Public company accounting must comply with the new guidelines as of January 1, 2019 on leases that start after December 15, 2018. Other types of organizations—private, nonprofit, et cetera—have later deadlines, the latest of which is December 15, 2020. Older leases are grandfathered in, though lease renewals are a bit trickier. Under the new guidelines, future rent payments over the period of a renewed lease will be included in the lease liability, if you’re likely to take the option to renew. If you have a three-year lease with a three-year renewal option, that could mean doubling your lease liability. If a lease falls into that category, you’ll want to consider other options, such as purchasing the property or renegotiating terms.
Regardless of your deadline, there’s a lot for lessees to consider in advance. Your To-Do list should include:
- Creating a transition timeline
- Creating a compliance action plan
- Educating financial reporting staff as details change
As with the existing generally-accepted accounting principles (GAAP), you’ll also need to:
- Identify leases
- Assess them to see whether they’ll be treated as capital or operating leases
- Account for each, and meet lease cash flow disclosure requirements on an ongoing basis
The changes are meant to give investors a more accurate picture of a company’s overall fiscal well-being. The more immediate effect, however, is that companies will have to reassess their leases. This can mean new hiring expenses for people to conduct the assessments and report their findings. Apart from the potential for tax-time chaos resulting from the changes to lease renewal options described above, there will be potential fines and penalties for non-compliance, some of which are still in flux. Check with the FASB for specific information regarding penalties.
How an IWMS Helps Ensure FASB Compliance
Since you’ll need to dig into your lease terms anyway, the FASB update presents an opportunity. You could use an army of skilled staff to address the issue on an ongoing basis. Alternatively, you could use an IWMS like IBM TRIRIGA to do the lion’s share of the work. The system’s Real Estate Manager has long helped companies handle their portfolios and run scenarios to get the best deals for and use from their assets. Now it incorporates the specific information required for complying with the new FASB lease accounting standard as well.
IBM details how it has been updating IBM TRIRIGA to help users at all levels comply with the new lease accounting standards:
- CFOs and CAOs will get real estate and asset lease accounting sub-ledgers for journaling, closing periods and creating reports in line with the new standards.
- Managers of real estate and fixed assets will let lease administrators enter contract information, while lease accountants will be able to assess the leases for compliance.
- Managers and occupants of specific facilities will get mobile app updates to ensure all services and related spending are accounted for properly.
There’s far more to IBM TRIRIGA than the Real Estate Manager module, too. Combining modules helps you get the most profitable use from all the assets in your portfolio and discover new opportunities for savings and potential revenue streams. Energy Manager could help you get a handle on demand charges, while Facilities Manager is great for helping you see how using your space differently would affect your costs and productivity. It’s worth a look.
The Tricky Part: Getting the Right Data Into Your IWMS
As with any enterprise software, the tricky part of IWMS implementation is getting your existing data ready to be read by new applications. Too often, this involves filling out complex spreadsheets to map current data into the new system. This is stultifying, detail-oriented work that takes time and invites errors.
eCIFM has created a data migration tool to automate this process. The tool acts as middleware between your data and IBM TRIRIGA. It adds data, validating it before importing it into the system. Although your data might already be devoid of duplicate records and errors, this is a great opportunity to fix any shortcomings. The data migration tool also performs all of its functions in a quarantined development environment prior to migrating to IBM TRIRIGA. This helps ensure security throughout the process and lets you test everything before declaring it ready for primetime.
eCIFM staff are among the best IBM TRIRIGA developers and implementers in the world, with decades of experience optimizing the system for companies in multiple industries. We also offer a suite of supporting mobile apps to extend IWMS beyond the desktop. We’d love to hear about your current systems and help you overcome the challenges in complying with the new lease accounting standards. Contact us today.