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.

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.

To comply with new lease accounting standards governing leases, businesses’ real estate and finance functions will need to collaborate via property management technology.

One former chairman of the International Accounting Standards board used to joke that his ambition was to one day fly in a plane that actually existed on the airline’s balance sheet. The point being that assets leased rather than owned by a business have never had to be included in such accounting, even though they may constitute substantial liabilities.

Until now that is. New regulation due to come into force in January 2019 will require all publicly-listed companies to include the value of their leasing obligations in their annual statements of assets and liabilities – and for most companies the biggest impact is going to come from their portfolios of real estate.

The rules, contained in the IASB’s IFRS 16 standard (and the Topic 842 regulation from the Financial Accounting Standards Board in the US), are set to have a huge effect on the publicly-declared state of the finances at many companies – particularly larger retailers and hoteliers that may have huge estates of leased properties.

Given the significance of the changes to come – the new lease accounting standard, by some estimates, will bring $2.8trn worth of assets on to company balance sheets globally – it’s not surprising that finance departments are beginning to get nervous. But when it comes to the business’s property leases, do they have a handle on their exposures?

The short answer at many companies is likely to be no. Property leases, understandably, have until now been almost entirely the domain of the real estate function, with finance paying relatively little attention.

So can the task of preparing for IFRS 16 be left to the business’s real estate professionals? Again, the answer is pretty obvious; even the most experienced property teams are unlikely to have the accounting expertise necessary to manage compliance in the right way by themselves. And even if they do, finance will need to consider the effects of lease accounting in the context of the business’ balance sheet.

Instead, a joint approach is now required. That will require businesses’ real estate and finance functions to work together more closely than ever before; there will also be a crucial role for better property management technology.

Essentially, complying with IFRS 16 is going to be a three-stage process. Businesses will need first to identify and consolidate all their relevant lease files; then they’ll need to work out which of the leases are caught by the new standards (some short-term leases won’t be); finally, they’ll need to bring all economically relevant data points onto the balance sheet.

It’s likely that the real estate function will do the lion’s share of the work involved with the first of those tasks, while the second job looks more like a joint effort and the final stage is going to see finance take the lead. But neither side is going to be able to do any of this work effectively without collaborating with the other.

The ideal scenario is that the business’s real estate team talks to finance right now about the data that’s going to be required. It can then consider whether its current property management technology is up to the job of generating all of the data required – and, if not, what the alternatives might be.

With the right technology in place, the process can be very smooth. Real estate will ensure its systems are capable of delivering all the information that finance requires to meet its accounting obligations from January 2019 onwards; and when the standard kicks in, all relevant information will already be flowing between the two functions.

Without a closer working relationship, however, the scope for confusion and, potentially, non-compliance is frightening.

Takeaways:

• New lease accounting standards that come into force in 2019 will require companies to record the value of real estate leases on their balance sheets
• Both real estate and finance will need to work together to deliver compliance under the new standards
• Property management technology can help real estate provide finance with the key data and information required
• By working more closely together, real estate and finance can take a strategic approach to future lease design

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