Proposed changes in leasing accounting standards are creating concerns among many businesses that use long-term leases, with 92 percent of executives in a new survey indicating they are unprepared to address the changes.
The new accounting standards from the Financial Accounting Standards Board and the International Accounting Standards Board would require a company’s leased assets—such as real estate, vehicles, equipment and IT systems—to be added to their balance sheet as a capital asset. Companies would have to list the value of their lease on the balance sheet. While the new standards are expected to be finalized later this year, both FASB and the IASB have not yet agreed on all the details (see FASB and IASB Part Ways on Leasing Standards).
A new survey by IBM and CFO Research Services of 179 senior executives from large global companies found that the new rules will require considerable changes to companies’ operating and finance strategies. Seventy-nine percent of the survey respondents anticipate moderate or substantial changes in their accounting policies, processes and practices, while 53 percent also expect to adjust their related operational strategies for real estate. Sixty-three percent of the senior executives expect their companies to make changes in information management systems to comply with the new rules.
About half of the survey respondents were most concerned about the impact of the new lease accounting changes over their debt/equity ratios and return on assets. Sixty percent of the senior executives said they would need to make some changeS in their planning, budgeting and forecasting systems, while 49 percent expect to put in place new or upgraded business intelligence systems.
“We wanted to get an understanding of the impact on their organizations from really a strategic perspective and how it’s going to impact them from an operational perspective,” said John Clark, a category manager for integrated workplace management systems at IBM. “What operational changes do they expect to make, and what technologies do they think they will need to upgarade or acquire now software to solve?”
Sixty percent of the respondents anticipate the need for changes or new software in their enterprise asset management systems as a result of the lease accounting changes, while 56 percent expect to address real estate and facilities management systems. Seventy-four percent agree that their companies will need to conduct additional training to adapt to the new lease accounting standard. More than half feel they will need significant time to prepare for the new standards, with 58 percent predicting six months to two years.
In conjunction with the release of the survey results on Friday, IBM is announcing software to help companies manage the lease accounting changes. IBM TRIRIGA software includes new analytics to provide more visibility into the impact on a company’s balance sheet and income statement from the leasing accounting changes. The software also provides financial assumptions and audit controls for both real estate and equipment leases; and automates management review and approval processes to help companies deal with the new standards.
IBM acquired TRIRIGA last year. The latest version of the software includes strategic facility scenario modeling features to increase the return on leased real property assets. The software can provide operational controls such as critical date alerts, payment processing and financial assumptions for leased real estate and equipment assets. It also includes balance sheet and income statement analysis of complex real estate lease decisions, such as 10 years with two renewal options versus 20 years. In addition, the software can help predict future demand for space and display gaps between demand and availability of real estate space.
The software can work with either an Oracle or Microsoft SQL Server database. “It provides a set of capabilities to accelerate the assessment of the impact of these leases on the balance sheet,” said Clark. He noted that IBM is closely monitoring the changes in the FASB and IASB leasing standards and will be updating the software as the standards evolve.