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Do you have your SOX-compliant portfolio plan yet? April 5, 2010

Posted by Bob Cook in Alternative Workplace Strategies, Financial Planning & Analysis, Lease Accounting.
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I’ve been writing about the impact of the new lease accounting standards to be set by FASB and IASB.  By June of this year the Exposure Draft outlining the standards will be in place with compliance likely to be required in late 2011 or early 2012. Corporate real estate – both strategy and process – is going to be mightily affected.

One aspect of the standard, in particular, is going to have far-reaching consequences – namely the accounting for leases with options to renew. This accounting is going to force corporate real estate departments to have documented portfolio plans. And these are going to have to be diligently created plans, created with SOX-compliant processes, that pass muster with auditors.

Here’s the background: The present value of future lease obligations will be going onto balance sheets. Most companies won’t like this because it will spotlight their financial obligations to landlords and negatively impact some measures of profitability such as Return on Assets. But here’s the interesting wrinkle on the present value calculation: the amount of lease obligations has to be based – not just on the present term of the lease but – on the likely lease duration, taking into account optional renewal periods.

Impact on strategy and process: That means that each quarter, corporate real estate departments are going to have to state what they think will be the likely lease durations for those leases with options to renew. Upper management is going to be pushing to make non-renewal assumptions, where legitimate, particularly for large leases. Auditors, though, will be scrutinizing any assumptions that renewal options will not be exercised and are probably going to require that formal portfolio plans, supported by the affected business units, be in place to substantiate renewal assumptions. And they’re going to want to review the processes used to create those plans.

How Corporate Real Estate Execs lives will change: Real estate planning is going to have to look ahead more than it typically has. This is going to be a challenge for corporate real estate departments in terms of staffing, but even more so in terms of getting business units to work with them on developing longer term plans.

For corporate real estate departments, this is “good news / bad news”. The “good news” is that they will gain CFO support in their efforts to get business units to do longer-range real-estate planning with them – something which many corporate real estate execs would like to do, but which business units are usually loathe to do.  The “bad news” is that corporate real estate departments are going to be in the “hot seat.” They’ll have responsibility to prepare a plan, but they’ll be dependent upon the cooperation of others across the enterprise to prepare them. Not an enviable situation.

So what can corporate real estate execs do? As always, starting early will help. Corporate real estate execs have to start tackling this issue now. They can lay out their process for developing portfolio plans, identify the major leases or collection of leases that deserve scrutiny, understand what options to renew exist, educate themselves about the new accounting standard, begin to educate their internal clients about it, and in general, get on with the business of portfolio planning.

 Other posts on lease accounting:

Beware new lease accounting guidelines coming

IASB confirms June 2010 date for lease standard exposure draft


1. Tweets that mention Do you have your SOX-compliant portfolio plan yet? « Corporate Real Estate Strategy -- Topsy.com - April 15, 2010

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