Following several years of deliberation,
the International Accounting Standards
Board (IASB) released IFRS 16, Leases
on Jan. 13, 2016. The new standard for
lease accounting is due to take effect
on January 1, 2019.
The issuance will induce change,
especially for lessees with significant
existing operating leases that aren’t
currently on companies’ balance sheets
such as retailers, transportation and
telecom users, and hoteliers. Notably,
the new standard does not address
specific treatment for real estate
separately. All classes of leased assets
are deemed one and the same in a
single model approach.
The intent of regulators is to provide
greater transparency by removing the
shadow debt created from operating
leases. However, investors,
shareholders and financial
analysts typically capture the
true financial position inclusive
of lease activities through
normalization adjustments to
key performance indicators.
No such adjustments will be necessary
upon implementation of the new
standard, allowing for improved
comparability between companies that
lease to those that own.
While intent is clear, and for some,
the change will merely be another
compliance exercise, the precise
impact of conversion for corporate
occupiers can only be determined
through pro forma quantitative analysis,
by calculating historical and current
operating results in accordance with the
new standard. This “what-if” approach
will arm corporate decision-makers with
the knowledge they need for developing
a viable real estate strategy, given the
new accounting measures.
The changes to lessee accounting on
financial statements can be quantified
to assess magnitude, whereas the
impact from revised corporate
real estate strategies can only be
determined over time. The residual
effect of the change in lessee
accounting on occupier operations
could well be more pronounced than
accounting implications. Corporate real
estate personnel will need to
expand their roles to a more
strategic function to maintain
competitive advantages, avoid
unexpected
pitfalls
and
identify key drivers of change.
The change to lessee accounting should
have a lasting effect on corporate
real estate management through a
consolidated system. Corporate real
estate departments have been
administrative functions for
many large occupiers, whereby
tracking and managing of
properties can often times still
be undertaken by outdated
methods, with decentralized
information spread across
multiple platforms, within different
departments, or even across business
units. Such systems will be problematic
for implementing the changes to lessee
accounting, which will require detailed
information to accurately account for
both the RTU and liability. Even asset
management systems might not
be sufficiently automated and
properly integrated between lease
administration, tax, accounting and
other departments.
In addition to initial application,
subsequent remeasurement, changes
to lease terms, mandated quantitative
disclosures, and accrual of contingent
rents make up just a few of the
new time-intensive responsibilities.
Implementation of a robust plan is
needed to gather pertinent lease
data and develop an action plan to
consolidate data into a centralized,
customizable and automated property
management system that can fulfill the
needs of each department.
Corporate occupiers with significant
leasing should organize an integration
committee across all cross-
functional departments that
play a role in either the usage or
reporting of corporate facilities.
Each company has distinguishable
priorities that require careful and
tactical evaluation. Through this
broadbased approach, a full account
of the potential impacts and processes
can be determined, spurring a fresh
strategy that will align operational and
accounting objectives.
Lessee Accounting: Implications
of the New Leasing Standard
Revised accounting for leases will be an impetus for revisiting operational strategies.
Early assessment and preparation is essential for occupiers for financial accounting,
and in formulating a successful corporate real estate strategy.
Cushman & Wakefield’s expansive
service offerings can assist occupiers
with implementation of the new
lease accounting standard. Valuation
and Advisory’s (V&A) Financial
Reporting group provides valuation
and advisory services pertaining
to U.S. GAAP and IFRS financial
reporting requirements for tangible
and intangible assets and liabilities.
The Global Occupier Services (GOS)
team creates solutions that provide
a comprehensive menu of integrated
real estate and facility services
combining
worldwide
reach,
coordinated local execution, and
advanced data analytics.
BRADLEY WOOD
Director, Valuation & Advisory
Financial Reporting
bradley.wood@cushwake.comThe Occupier Edge | 21