NEW YORK CITY — The new FASB lease accounting standard is changing the way companies organize and communicate lease information, requiring public and private companies to report their leased assets, including real estate, on their balance sheets. They must also recognize the assets and liabilities for leases of more than 12 months. State-owned enterprises were to be compliant by January 2019 and private enterprises by January 2020.
Implementing this within an organization requires a great amount of planning and coordination between operational and finance teams. In addition to a reliable software solution, timing is extremely important. Collecting and validating data to become compliant will be a difficult process.
The New York chapter of CoreNet Global, an organization for commercial real estate professionals, regularly addresses topics surrounding the changing real estate environment in its event programming. To dig deeper into some of the key questions, I sat down with Jessica Epstein, project manager at Hearst who leads their lease administration and lease accounting project.
Dunaway: When should a business start preparing for changes in accounting standards?
Epstein: If you are a public company and have not yet started the process, you should do so immediately. If you are a private company, the sooner the better. It takes time to understand the policy and the platform even before the long accounting process. In Hearst, we started planning a year and a half ago.
Dunaway: What are the first steps to take?
Epstein: First, you need to choose a software solution that can contain lease information and use that information to generate accurate calculations and journal entries for the new directives. Determine how many records you have and what else you want the database to do: manage leases, run alerts, log into the ERP system, etc. If you already have a platform with a mod to manage changes, you’re in luck.
To ease the burden of adopting the new standards, the FASB has established practical expedients to accommodate businesses. Your finance team should familiarize themselves with the new standard and determine whether they want to adopt any of the expedients. This will affect the type of data needed to drive calculations and reports.
It is vital that Real Estate and Finance Operations are involved from the start. While most of the data is in the leases themselves, some information will be needed from your finance team.
Dunaway: What are the requirements for a lease administration platform?
Epstein: It depends. The current driving force for adopting a lease administration platform is the FASB requirements, but there can be many reasons for using a platform. Anyone can benefit from the data stored in the system, especially if it is easy to report. Determine who in your business is going to use the platform and how. To choose a database, determine how many users you will have and what level of expertise you will need to train them on. Each department that touches on leases should be consulted for its specific needs.
Beware of a system built with proprietary infrastructure. This can be difficult for training and ongoing maintenance. Look for systems that are constantly investing in functionality and can adapt and evolve as your business needs change. Keep in mind that you are not only reporting real estate, but also equipment. The software must be able to support both. Also, remember that you are purchasing support, training, and a lifeline of resources for your team. Make sure you find a supplier you trust and who meets your needs.
Dunaway: What are the biggest challenges and concerns in preparing the database for reporting?
Epstein: The biggest challenge is to collect and maintain the integrity of the data entering the platform. Terms and definitions should be consistent across all departments. For example, does base rent mean the same thing in law and finance? Everyone must speak the same language for the data collected to be consistent.
The rationalization and maintenance of the database largely depends on the users. You need the database to be managed organically by all users. Keep this in mind when creating new multi-service policies and procedures. Preparing upstream pays off in the long run.
Wanda Dunaway is Regional Vice President at Shaw Contract. Jessica Epstein is a project manager at Hearst. The views expressed in this article are those of the author and the interviewee, and not those of ALM Media’s real estate group.