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For your self-preservation, Mr Corporate Real Estate Exec … September 2, 2010

Posted by Bob Cook in Financial Planning & Analysis, Lease Accounting.
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Regarding the new lease accounting, Mr. Corporate Real Estate Exec, you really shouldn’t be waiting to get direction from your accounting folks. You need to understand the implications of this new standard now and begin making preparations to comply. 

The Exposure Draft on Leases was issued by IASB and FASB in mid-August. Your company’s technical accounting folks are probably reviewing it, digesting it, and starting to think about its implications for the company financial statements and for its accounting processes. Their world is different from yours, though … and you can’t expect them to anticipate and address the challenges you will be facing as a result of the accounting change. You need to address this thing yourself; get ahead of it … before it gets ahead of you. 

Your accounting folks will be quantifying the impact of the accounting on company financial statements. They’ll not, though, be worrying about how it’s going to affect your real estate budgets and how you’ll have to change formulas for allocating expenses to business units. Your accounting folks will be preparing process diagrams showing how the accounting processes will flow once they get the required lease information from you. They’ll not, though, be worrying about how you meet the challenge of assembling, recording and providing all that information in a SOX-compliant manner. Your accounting folks will see and maybe advise you on how the structure of real estate transactions affect the financial statements. They’ll not, though, be the ones who will have to justify the structuring decisions you are making today … decisions that will suddenly affect company financial statements when the accounting is adopted because there will be no grandfathering of existing leases. 

The heavy-lifting in terms of compliance (not to mention, the managing of implications for real estate strategy) is going to be done by corporate real estate departments, not accounting departments. You’ll have to design new SOX-compliant processes to record lease information (much of which is not now in lease administration systems) and to make assumptions about future needs. You’ll have to implement new IT systems or at least enhance your existing systems. You’ll have to revamp your charge-back systems and communicate that change to your internal clients. You’ll have to audit your present lease information for completeness and accuracy. You’ll have to hire and train people, or engage service-providers, to manage the new processes, input data, and collaborate with the accounting department.  

Yes, this accounting change is going to pose major challenges for you, Mr. Corporate Real Estate Exec. It may be soothing to think that you can wait to hear from your accounting folks on this issue before taking action, but you do so at your own peril. The challenges are many and the time available to comply, while not yet prescribed by the accounting boards, is likely to be much less than what you’ll think you need. The sooner you start, the more time you’ll have.  

Don’t be one of the corporate real estate execs … and there will be some … who don’t address this until their accounting department gives them direction. Here is what will unfortunately happen in many situations: The accounting department will eventually issue a list of lease data that the corporate real estate exec will have to provide. Not knowing, though, how difficult it is to assemble and record this information, the accounting department will not issue the list until there is insufficient time and industry resources to put the data-assembly-and-recording processes and systems in place before the standard must be adopted.

That situation … a career-killer, if ever there was one … is not one you want to find yourself in.

 

Click here for more posts on the new lease accounting.

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1. Tweets that mention For your self-preservation, Mr Corporate Real Estate Exec … « Corporate Real Estate Strategy -- Topsy.com - September 2, 2010

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2. Three facts that compel you to tackle the new lease accounting NOW « Corporate Real Estate Strategy - October 17, 2010

[…] been told … admittedly, correctly so … that the standard hasn’t even been finalized yet.   “Danger, danger!“  Maybe you need Will Robinson’s robot to warn you about what is just around the […]


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