While finance has a key duty to ensure compliance with accounting standards, reforms to the rules on leasing will bring real estate and its property management technology into the picture.

Who should take responsibility for leading the response to the new accounting standards that the International Accounting Standards Board and the Financial Accounting Standards Board will introduce with effect from January 2019?

On the one hand, accounting standards are traditionally the preserve of the finance function; on the other, these particular reforms are all about bringing the value of lease obligations onto the balance sheets of publicly-listed companies; since property assets will form the largest part of those obligations for many businesses, real estate clearly has a significant role to play too.

In reality, of course, this isn’t a binary question. Both finance and real estate are going to be involved in ensuring compliance with IFRS 16 and Topic 842 once they come into effect, and in managing the impact of the standards on an ongoing basis thereafter.

However, it is important that both functions recognise the important role each other has to play – and that they work collaboratively on the business’s response to the reforms as equal partners. That may represent a new way of operating at many companies, where real estate will traditionally have taken its lead from finance.

The good news is that finance directors are increasingly getting to grip with the basic impacts on their businesses of the reforms – particularly the headline changes to key financial metrics such as debt and profitability that may occur following the adoption of the new standards.

Equally, however, real estate directors bring specialist knowledge to the response to IFRS 16 and Topic 842. They also have the key tools required to do the detailed work now needed – their property management technology, whether existing or new, is the best route to identifying which leases are relevant to the new standards, extracting the key data from these leases, and also modelling future leases for their potential impact on the balance sheet.

The division of labour and responsibility between real estate and finance is therefore going to be even-handed. Certainly, checklist guidance from leading accountants suggests a number of key roles for both functions: for real estate, the challenges include identifying all property leases, checking systems are capturing the right information and monitoring it on an ongoing basis, and reconsidering lease strategy in the light of the reforms; for finance, key tasks will include considering exemptions and transitional reliefs, modelling the impact on financial results and statements, and communicating these impacts to stakeholders.

This is not an exhaustive list for either function by any means. But the important part to grasp is that finance and real estate will need to work hand-in-hand in the face of these reforms. The partnership approach will ensure the business benefits from both functions expertise and experience during the transition and on an ongoing basis.

Moreover, ensuring your business’s property management technology is capable of generating the data required is going to be an essential part of that split; the danger otherwise is that finance misses the opportunity to maximise value and minimise impact by trying to manage the process through its existing (but more limited) enterprise resource planning systems.

Takeaways:

• New accounting standards that come into force in 2019 will require companies to record the value of real estate leases on their balance sheets
• Real estate and finance need to take joint responsibility for managing the response to this change
• Property management technology holds the key to a successful partnership between real estate and finance

As a residential property manager, what are the fundamental factors that persuade your clients – whether leaseholders or committees – to recommend you?

The changing face of recommendation

New business development in the market has always been highly driven by recommendation, as targeting leaseholders and committees is a hard task to do directly.

However, the way that recommendations are made today is changing. In addition to meeting at networking events, leaseholders and tenants share information via online forums such as LinkedIn, Twitter and industry-specific websites.

It is common sense that in this digital age, prospects will look positively upon businesses – including block management companies – that use IT efficiently and effectively.

This could be:

• The speed and quality of your responses to queries and issues such as maintenance problems.
• Accurate service charges, forecast correctly, which can be paid online in an easy and convenient way.
• The professionalism and efficiency of your service and of the contractors you hire, which assures them that their property is in good hands.
• The transparency and facility of your online property management portal, which gives them up-to-date information and transaction details.
• Regular and frequent communication and updates on important issues, so that they feel well-informed and that you are responsive and engaged.

Each of these areas can best be achieved through smart, comprehensive property management software.

So how should block managers go about selecting such technology? How can they judge what will best enable them to achieve the business growth they seek?

Here are some factors to bear in mind:

• Look at what systems other block managers have adopted. Consider the size of their operations, the type of clients they work with and the type of properties they handle.
• Consider buying a property management software package that has proved itself a market leader, with a strong reputation within the industry. Look for cases studies and seek references.
• Calculate how much time and resources you can save, which can be reinvested in new business development. A great software package should present significant opportunities to market your services more widely.
• Find out about the business insights that a property management system can offer. For example, it may allow you to view your property data to produce detailed forecasts and reports.
• Consider the online and self-service functionality of a property management system. New clients will place a high value on this aspect: it improves communication, speed of response and data integration while saving money and time.
• Seek out a system that can offer you the ability to market to both leaseholders and residents, driving revenue from all building users.
• Prioritise a supplier with a well-worked out mobile and apps strategy, together with Software as a Service (SaaS). This shows that you are at the forefront in adopting new technology, to the benefit of your clients.
• Choose a system that can allow high levels of collaboration between all stakeholders in the property management process, driving further efficiencies through the whole supply chain.
• Look for a property management software provider with strong training and support. As a block manager, your employees may not be IT experts, so you want them to gain good understanding and use of software quickly, and be able to help your clients to use it.

So, in summary, to achieve optimum results and to grow your business, it is crucial to have demonstrable technology that supports the following areas:

• Accurate and well managed service charges.
• Excellent relations with contractors, together with fast response times.
• Frequent and full communications to all stakeholders.
• Efficient administration and good use of resources.
• Compliance with RICS and ARMA regulations, along with an awareness of current and forthcoming legislation.

The more work you are able to take on, the better able you will be to pitch to new clients. By demonstrating your ability to handle higher volumes of work, you can also stress the benefits to clients: you can negotiate discounts from contractors and suppliers, and achieve other economies of scale in your own administration.

It’s the ultimate good recommendation: hire this block manager and get great service. Few people would argue with that.

 

New lease accounting changes will prompt many more businesses to embrace evolving property management technology

The countdown has begun, but is your business ready for new lease accounting changes that will require all publicly-listed companies to account for the value of their leasing obligations on their balance sheets? If not, time is running out – the new standards come into force on 1 January 2019 – and new property management technology trends, such as the move towards artificial intelligence, may be your best hope of complying.

The regulation, contained in the IFRS 16 regulation (or in Topic 842 in the US), means any business that leases real estate, as well as plant and machinery, will need to identify every single lease they’ve signed, check whether it is within the scope of the new rules (some short-term leases are excluded), and assess its value so that the obligation can be included in its balance sheet.

Vast numbers of businesses will have to respond to this reform. And while industries such as retail, leisure and travel, which hold large numbers of property leases on disparate sites, will be particularly affected, no company can afford to rest easily. One in two publicly-listed companies around the world will be affected by the new standards according to the International Accounting Standards Board and the US’s Financial Accounting Standards Board, which are together driving the changes.

The effects could be dramatic, warn analysts and accountants. At the supermarket group Tesco, for example, some analysts believe the company’s debt will double to almost £18bn under the new rules.

However, it’s not just the end result that businesses will have to deal with. Getting there is likely to be onerous too – many large companies are sitting on vast numbers of leases, covering real estate in markets all around the world and often held in disparate locations or by a large number of subsidiary companies. All of these leases must now be found and interrogated in order for businesses to make compliant accounting submissions from 2019 onwards.

Conducting all of that work manually will be time-consuming, burdensome and expensive for many businesses, diverting resources that could otherwise be employed on supporting the company in its growth objectives. For that reason, many companies are now exploring technology-driven solutions as they work out how to respond to the lease accounting challenge.

In particular, property management technology enthusiasts are focusing on artificial intelligence (AI) and deep learning tools, which look very promising in the context of the work required. The idea is that these tools will employ trained algorithms that will read each lease held by the company, identify and extract all of the data potentially required for inclusion on the balance sheet, and provide a decision on which of this data should be included under the terms of the new standards.

In other words, AI has the potential to automate the process of IFRS 16 compliance – and to do so more efficiently and accurately over time, as the system learns from the increasing amount of data it has processed. Some manual intervention may still be required – to check the system is delivering the right data, for example – but this need should diminish over time.

AI tools of this sort can also identify missing data that isn’t included in a lease, but which the company needs to comply with the standards. This can feed through into processes for obtaining the information required. The tools can also interrogate the lease documents to check they’re consistent and accurate – as Emilio Matthaei points out in one recent blog, this might help businesses establish that a lease which mentions an amendment, for example, actually includes this amendment on file.

In short, for large companies with many leases, property management technology such as AI tools may now offer the best possible chance of getting accounting right before IFRS 16 comes into force – not to mention managing the burden of delivering compliance.   Takeaways:

• New lease accounting changes that come into force in 2019 will require companies to record the value of real estate leases on their balance sheets
• Complying with the lease accounting changes will require companies to identify and extract relevant information from every single lease document they hold
• Artificial intelligence technologies can help to automate the compliance process
• Property management technology can free up your staff for value-adding work

For more information on our lease accounting solution, please visit the IFRS 16 page.

New accounting standards will see real estate leases take on an unprecedented significance for company finances, shining a spotlight on the business’s property management technology

For real estate professionals negotiating and signing new leases, life is about to get significantly more complicated. From January 2019, the introduction by the International Accounting Standards Board of IFRS 16, a new accounting standard focused on ensuring the value of leasing obligations is reported on publicly-listed companies’ balance sheets, poses all sorts of challenges.

The rules are likely to see the value of companies’ liabilities and gearing increase significantly according to analysis. That will apply both at the moment of transition, as existing leases are reported on the balance sheet for the first time, but also on a continuing basis with all new leases signed thereafter coming under the new rules.

For the real estate functions of large businesses, therefore, IFRS 16 represents a watershed moment that they may not be equipped to deal with. Businesses without property management technology that includes modules designed to cope with the new rules are likely to find themselves in particular difficulty.

The challenge is twofold. Finance departments have already started putting pressure on their real estate colleagues to identify all leases covered by the new rules and to begin extracting the data required under IFRS 16; for many companies that will be a major undertaking. But just as daunting is the long-term implication of the reforms – now that leases will have such a material effect on the company’s publicly stated financial standing, it will be crucial to consider this issue when entering into new lease agreements.

In other words, real estate functions are going to have to become more strategic in the way they approach new leases; the impact of every lease covered by IFRS 16 will need to be considered in this context. The real estate function may even find that its preferred approach to property leases is no longer in the best interests of the business – and that it therefore needs to change tack in order to optimise future lease design.

To make such decisions, real estate and finance will need to work more closely than in the past – and to exploit property management technology that is capable of modelling the potential balance sheet effects of each new lease under consideration; such models will be the key to identifying the best way to proceed – and therefore to informing the negotiating strategy and priorities for real estate as it discusses new agreements with landlords and freeholders.

If that sounds intimidating, bear in mind too that for many international companies, this modelling process will also have to be able to cope with the different approach taken to lease accounting by the Financial Accounting Standards Board in the US. Its Topic 842 standard, which takes effect around the same time as IFRS 16, is based on identical principles, but works differently from a technical perspective. Businesses covered by this standard as well as IFRS 16 therefore need property management technology that is able to model on the basis of both systems.

The ideal approach will be one that is pursued jointly by finance and real estate, given their respective experience and expertise. Where either function seeks to act in isolation, they risk missing crucial nuances that may have a major impact given that globally, IFRS 16 and Topic 842 are expected to add $2.8trn worth of assets to company balance sheets.

Takeaways:

• New accounting standards that come into force in 2019 will require companies to record the value of real estate leases on their balance sheets
• The effect of these standards will require the real estate function to think more strategically about lease design in future
• Real estate must work in close partnership with finance to manage compliance and deliver strategic goals

For more information on our lease accounting solution, please visit the IFRS 16 page.

New accounting rules focusing on leases will make tough demands of real estate – make sure your property management technology is up to the job.

It might be wise for real estate professionals to think of 1 January 2019 as D-Day for their departments. This is the date on which the International Accounting Standards Board’s new IFRS 16 standard becomes effective; thereafter, all publicly-listed companies will be required to ensure the value of their leases, including their property leases, are accounted for on their balance sheets and other financial statements.

The reforms will apply in the US too, under the Financial Accounting Standards Board’s Topic 842 regulation, so many companies will be dealing with two separate major new accounting standards – albeit similar – from 2019 onwards. Real estate will find itself front and centre of the considerable effort required to transition to the new rulebook – and to manage its impacts on an ongoing basis thereafter.

The IASB itself concedes there will be substantial costs for companies making the switch, as well as challenges and difficulties managing the impacts, but it believes the benefits of greater visibility of businesses’ leasing obligations more than justify the downsides. In other words, businesses now have no choice but to get on with the job of preparing for IFRS 16 and Topic 842 – and find the most efficient and effective way of doing so.

For real estate functions, it will be crucial to have property management technology that is fit for purpose. Indeed, the imperative is so strong that the reforms should prompt real estate to modernise their IT infrastructure, replacing legacy systems that will not deliver what is needed. Accountancy advisers argue that assessing the capabilities of existing technology is one of the first steps businesses will need to take as they plan for IFRS 16. And given that the new reforms make considerable demands on the finance function – which will require collaboration and support from real estate – now may be the perfect time to push for the resources needed for renewal.

Your property management technology needs to be capable of delivering a range of outputs. For transition, it should be able to organise and access all relevant property leases; it should also be able to extract the key data required from those leases for IFRS 16 purposes; and it should be able to deliver that data to finance in a format that can be easily integrated by its IT systems. In addition, on an ongoing basis, property management technology will need to be able to model the impact of new leases on the balance sheet, to inform real estate and finance about the implications of new property transactions and how best to structure them.

Systems that don’t provide accurate tracking and monitoring of key data will put your business at a real disadvantage, requiring resource-intensive manual interventions to make corrections and add missing information. In turn, that will inhibit the real estate function’s capacity to offer strategic advice on leasing in the context of the new standards, preventing it capitalising on an opportunity to add significant value.

Practically speaking, this is real estate’s opportunity to replace cumbersome on-site server based applications with a web-based alternative that provides the required functionality on day one and can be upgraded through automatic upgrades as new modules are required or new tools become available. For example, artificial intelligence and deep learning technologies may provide a real head start for real estate functions working to comply with the new standards.

Working in tandem with the finance department’s enterprise resource planning systems, modern property management technology will generate “one version of the truth” across the company – and enable real estate to meet its responsibilities and to add value as the new standards become effective. That will be crucial as real estate seeks to work in partnership with finance to respond to and manage these reforms.

Takeaways:

• New accounting standards that come into force in 2019 will require companies to record the value of real estate leases on their balance sheets
• Property management technology that cannot cope with the new standards will force companies to make time-consuming and expensive manual interventions
• To respond both tactically and strategically to the new rules on leases, real estate will need to move away from inflexible and limited legacy technologies

With new lease accounting standards coming into effect, businesses must decide how to manage the transition and ensure their property management technology is up to the job

The impact of the IFRS 16 accounting standard will be huge for many publicly-listed companies. For the first time, almost all lease obligations will have to be accounted for on the balance sheet – that will see the average company’s debt increase by 22% according to analysis by PwC, and by significantly more in sectors where businesses have big portfolios of property leases, such as retail and leisure.

The new rules are likely to have profound effects on how businesses think about leases for many years to come, but the first challenge is to manage the transition to IFRS 16; that will require companies to look at the capabilities of their current property management technology and to consider the pros and cons of different adoption methods.

In drafting IFRS 16, the International Accounting Standards Board (slightly different rules apply in the US under the Financial Accounting Standards Board’s Topic 842 equivalent standard) has given companies two options for making the transition:

• Fully retrospective accounting – under this option, for reporting periods that end after the effective date of the new standard, companies report on all their leases on an IFRS 16 basis as if the standard had always been in place; they must also provide a comparison of how their reporting would have looked under the previous rules, so that the effect of the new standard is transparent and visible

• Modified retrospective accounting – this is a more straightforward approach that requires companies simply to apply IFRS 16 on their leases from the effective date onwards, with an adjustment of retained earnings made on the balance sheets, but no comparison with the old method

Both approaches have advantages and disadvantages. The fully retrospective method provides a much more detailed overview of the figures and how they’ve changed under IFRS 16, and is likely to be more accurate; but it requires businesses to produce two reports simultaneously, will almost certainly be more expensive and time-consuming to deliver, and will need a large amount of historic lease data.

By contrast, the modified retrospective option will not depend on so much data and is likely to be considerably less burdensome; but it will depend on estimates rather than definitive information and could be less accurate, which may have knock-on effects on other key financial metrics.

The basic capability of the company’s property management technology is going to be one consideration in this choice. For example, is your system capable of generating the data required for the fully retrospective accounting? Can it even cope with the data requirements under the modified approach, which will still be demanding? Are you thinking about investing in new technology as part of the shift to IFRS 16 and should this capability be part of that decision-making process?

It will also be valuable to model the effects on the balance sheet and broader company finances of the two different options before you make a definitive decision. This will require collaboration with the finance function – and property management technology that is capable of producing the outputs finance will require to carry out this work.

Making the effort now, ahead of time, will pay dividends, particularly for businesses with large lease exposures. The selected transition approach will potentially have an impact on company profitability for years after transition – until the final lease in place at the moment of transition expires – so it’s crucial to get it right.

Takeaways:

• New accounting standards that come into force in 2019 will require companies to record the value of real estate leases on their balance sheets
• The new standards give two interim options for compliance: full retrospection and partial or modified retrospections
• Both approaches have pros and cons, so real estate will need to consider the business’s individual circumstances to choose the right way forward
• The transition approach you choose could have an impact on your company’s profitability
• Plan ahead now to identify the best way to proceed before the new standards become operative

For more information on our lease accounting solution, please visit the IFRS 16 page.

New accounting standards requiring businesses to bring leasing obligations onto their balance sheets will require many companies to get to grips with two different sets of rules – will your property management technology cope?

It has been billed as the biggest shake-up in accounting standards for 30 years, but many businesses are not yet ready for the introduction of new rules on leases. While the rules are due to come into effect in 2019 throughout the world, their property management processes and technology may not be fit for purpose.

The rules will for the first time require businesses to include on their balance sheets the value of all their obligations on leases that are longer than 12 months. But while they are expected to hit one in two publicly-listed companies and add $2.8 trillion to company balance sheets, many firms are not prepared. In one survey published last year 43% of respondents said they were not very well informed about the changes or that it was too early to tell what the impacts would be.

That’s worrying given that many businesses are actually facing two sets of changes they will need to prepare for. Not only does the International Accounting Standards Board’s IFRS 16 set out the process for bringing leases on to the balance sheet, but the Financial Accounting Standards Board’s Topic 842 in the US does the same thing. Many businesses with international operations are therefore going to have to cope with both.

The good news is that the IASB and the FASB worked together in drafting their standards with the aim of delivering a converged standard that would be consistent globally. Nevertheless, while the two organisations were united by a common purpose – to tackle the fact that 85% of lease agreements and commitments do not appear on the balance sheet – there are some clear differences between the processes they have put in place.

These differences begin with the effective dates of the two standards. While IFRS 16 isn’t due to take effect until 1 January 2019, Topic 842’s effective date is 18 December 2018, a couple of weeks earlier. More significantly, however, the IASB takes the single model approach while the FASB has opted for a dual model:

• The single model requires companies to account for all leases as “Type A” financing leases. The balance sheet therefore shows the acquisition of a right-of-use asset and a corresponding liability, with interest and amortisation expense recognised separately in the income statement.

• The dual model classifies leases as either “Type A” or “Type B” (operating leases with a generally straight-line lease expense pattern); both must be on the balance sheet, but the expense recognition and presentation are different.

Several other technical variations flow from this distinction. In the US in particular, the distinction between financing and operating leases will require additional work when compiling balance sheets and income statements.

Another issue, meanwhile, is adoption. Under IFRS 16, businesses are able to choose between fully retrospective reporting when accounting for existing leases, or a modified version; Topic 842 offers only the latter.

The question now for many real estate professionals – for property leases are likely to form the burden of most companies’ compliance work – is whether their property management technology is capable of coping with both sets of rules. Does it offer the functionality to identify and extract the key data under both IFRS 16 and Topic 842, and to feed that information into the finance department’s IT systems?

If not, the transition to the new standards is likely to be a painful one, requiring doubling up of effort and manual interventions to ensure compliance with both regimes, both at the transition stage and on an ongoing basis thereafter.

That will suck in resources that could be put to far better use elsewhere – and risk pitching the real estate function against finance as both grow increasingly frustrated about the unnecessary workload.

Takeaways:

• New accounting standards that come into force in 2019 will require companies to record the value of real estate leases on their balance sheets
• The new standards are being introduced by both the IASB and the FASB, with subtle differences between the two authorities’ approach
• Companies covered by both sets of standards must get to grips with the requirements of each one
• The IASB takes the single model approach while the FASB has opted for a dual model

For more information on our lease accounting solution, please visit the IFRS 16 page.