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Three facts that compel you to tackle the new lease accounting NOW October 17, 2010

Posted by Bob Cook in Financial Planning & Analysis, Lease Accounting, Profession of Corporate Real Estate.
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A lot of corporate real estate people have not yet begun tackling the challenges brought on by the new lease accounting.  You may be one of these.  You may think this new accounting is something that won’t affect you … that “accounting” happens downstream from your decision-making.  Wrong!   It’s going to rock your world … from how you strategize to how you manage.   Or, you may be one of those waiting for direction from your finance / accounting department, having 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 bend.  And don’t you watch action movies?  Don’t you know the bomb squad doesn’t wait until the existence of the bomb is confirmed before they spring into action?   Maybe you’ve been lulled into non-action because you’ve been told the Effective Date won’t be until 2013 or 2014, and therefore, you think you have plenty of time to address the issues.   Well, shame on your finance group, if they haven’t also told you about the comment period that ends in two months.  And double-shame, if they haven’t briefed you on the details of the accounting and its transition rules, particularly if they haven’t explained to you the meaning of:  “no grandfathering” and “retrospective application”.

Now, to be fair, the standard isn’t finalized and you might not want to “pull out all the stops” yet to address it.  There’s even a chance … ever so slight … that the standard, due out by end of June 2011, will be postponed… perhaps even indefinitely.   Still, there is plenty to get started on to prepare for its issuance.  In fact, what you should get started on is too much to list here…. but I’ll outline it in a future post.

While some of the details of the standard, as outlined in the Exposure Draft of August 2010, may be changed, the issuance of the standard, in a form close to that outlined, is pretty likely.  After all … the creation of this new standard has been in the works for several years and has followed a deliberate, rigorous process that included issuance of a Discussion Paper way back in March, 2009.  That paper outlined the general thrust of the standard … that all leases would go onto the balance sheet … and it solicited comments … pro and con …from companies and other interested parties.   Three-hundred comments were received … some supportive, some not.  The non-supportive ones did not persuade the FASB and IASB to change course.  The momentum to establish this new standard is strong.  Its issuance is not inevitable, but it’s very likely.

Now is the time to get cracking on this.  There are three facts that compel you … if you are involved in corporate real estate … to address the new lease accounting now:

Fact #1:  Comment Deadline.   December 15, 2010 is the deadline for interested parties to comment on the standard as outlined in the Exposure Draft.  Anyone can comment.    Corporate real estate execs should get involved.

It’s appropriate that comments made to the FASB and IASB come from finance departments who have the technical background to understand the nuances of the standard and to communicate their concerns in accounting language.  The finance department probably does not, however, understand how difficult it is going to be for the corporate real estate department to supply the type of data that the new accounting requires.  The corporate real estate department needs to share its perspective, particularly because that perspective will inform what-is-probably the most controversial aspect of this new standard … and that is the cost-benefit of the standards application.  Much of the cost … in terms of both out-of-pocket costs and demand on management time … will be borne by the corporate real estate department.  The finance department cannot address the cost-benefit question without input from the corporate real estate department.

Now, some corporate real estate execs may take the view that they don’t need to get personally involved because comments to the FASB and IASB from larger companies, with more resources to devote to comment letters, will cover the same concerns they would bring up.  Besides the fact that this is like a citizen deciding to not vote because he thinks his one vote can’t make a difference, there is a big problem with relying on the comments of others.   Every company is unique.  Your company may have special contractual situations that may be inadvertently affected by the new lease accounting.  You should know that the new accounting applies not just to explicit leases, but also to implicit leases.  A document doesn’t have to say “Lease” in its heading to be a lease.  Every company should be looking at its business model to see where this new accounting might apply.  Many companies are going to be surprised to find how it can apply to things like outsourced manufacturing, CoLocation datacenter contracts, and on-site solar energy contracts.  Some of these will be sorry they didn’t comment on the impact on their special situations.  Don’t you be one of these.

Fact #2:  No grandfathering.    It is almost 100% assured there will be no grandfathering of existing leases.   If existing leases were not put on the balance sheet at the time the new standard is applied, the balance sheet would become meaningless.

So… many leases being signed today will eventually fall under the new accounting.  And it won’t just be leases with expiration dates beyond the time when the standard will be put in place.  It will also be leases that expire sooner but that have options to renew for periods that go beyond the effective date.   Most sizeable leases would fall into one of these two categories.   If you are not already looking at these leases … and the relevant issues such as lease-vs-own and length of lease … through the lens of the new leasing, then shame on you.

Fact #3:  Retrospective application.    When companies first issue financial statements using the new standard, there will be a need to include prior-year comparison statements so investors can make year-to-year comparisons on an apples-to-apples basis.   Most companies will show two years of prior statements in what-the-FASB-and-IASB-call a “simplified retrospective approach”.   If you think through the timeline, you’ll quickly see that you may already need to begin collecting the required lease information, lest you end up having to scramble in three years to reconstruct what your lease data was three years prior.  For example, an Effective Date in 2013 would mean you need to have data to prepare 2011 financials using the new accounting and, in order to do that, you’d need information going back as early as 2010.  (Yes, that’s NOW!)  Unless you’re different from most companies, you  probably are not now collecting all the data points that will be needed for the new accounting.  If you don’t start now, you’ll have a huge headache later.

So, if you are one of those corporate real estate folks who have postponed addressing the new accounting because you are skeptical that the new lease accounting will have much effect on you … for example, if you don’t agree with the opinion that the spotlight it puts on corporate real estate is likely to transform the profession and what-is-expected of you … then, at least, these three facts should stir you into action.

FAS 13 and IAS 17 soon will both be history.  Learn more about the new lease accounting here.  If you’d like to follow my posts, click on the “subscribe me” on the side bar.

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Comments»

1. Richard L. Podos - October 17, 2010

Two thumbs up on this post, Bob!

Upcoming important events:

* CoreNet Global’s NYC Chapter is hosting an event this coming Wednesday, 10/20.

* CoreNet Global’s Strategy and Portfolio Planning (SPP) is hosting a Webinar on 10/27.

Short-term, we’ve all got to focus on the 12/15 date for comments.

Regards,
RLP

2. Kevin Moffitt - October 20, 2010

Good Notice Bob! Both thumbs up!


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