Certain dates are difficult to remember. Your wedding date, your work anniversary and even your birthday can slip your mind from time to time — with various repercussions for each. Some are unforgettable, such as the exact hour and minute your favorite sports team won its first championship. For commercial real estate professionals, there’s one upcoming date you definitely don’t want to forget:
- If you’re a public company, that date is December 15, 2018.
- If you’re a private company, that date is December 15, 2019 (for fiscal years beginning after that date) or December 15, 2020 (for interim periods within fiscal years beginning after that date)
Yes, December 15 should be branded on your brain. Why? Because that’s when new FASB leasing standards take effect. The year depends on your company and its fiscal year, but the following point remains: now is the time to not only think about it, but prepare for it as well.
Fortunately, we’re here to help. This post will cover what the new FASB leasing standards are, what’s changing with them and what you need to do to prepare for them — as well as how your company can smoothly transition and implement changes. Basically, are you compliant? Read on to find out.
What are the New FASB Leasing Standards?
By now, you should hopefully have a solid grasp on FASB basics. If you don’t, or it’s a bit hazy, here’s a quick recap. The short story is that lease terms and balance sheet standards are changing. If your leases are longer than 12 months, you’ll have to document the entire balance of lease payments as debts and assets. This complicated process mainly affects your clients, but it can also create changes in the types of leases and long-term demand for your portfolio properties as a CRE professional. The next section breaks this down further.
What’s Changing with FASB?
There’s no better source for what’s changing with the new FASB leasing standards than the FASB itself. Here’s what the Financial Account Standards Board has to say about it:
“The new leases standard will increase transparency and comparability among organizations that lease buildings, equipment, and other assets by recognizing the assets and liabilities that arise from lease transactions. In other words, current off-balance sheet leasing activities will be required to be reflected on balance sheets so that investors and other users of financial statements can more readily and accurately understand the rights and obligations associated with these transactions.”
Basically, the FASB says, there will be two types of leases moving forward: one that is consistent with the existing GAAP model (finance leases) and one that recognizes lease liabilities based on remaining lease payment values and corresponding lease assets (operating leases).
FASB Preparation Phase Checklist
Many of you might be thinking, “OK, changes are coming; big deal. It won’t affect my day-to-day operations.” Or you might be thinking that you can just worry about it later. Wrong! The time to start preparing for FASB changes is now. Here are a few things you should have under control:
- Get to know FASB standards. Reading the above section about the new FASB leasing standards isn’t enough. Make sure you have a thorough education about the ins and outs of the new FASB leasing standards. Your clients will depend on you to be knowledgeable about them, yes, but your awareness of FASB facts will dictate many of the actions you take to prepare for that December 15 date when the FASB standards take effect.
- Make sure you have the right technology in place. CRE software like Quarem can help immensely with the preparation, transition and implementation phases of the new FASB leasing standards. From tracking lease renewals and financial insights to critical communications, date monitoring, clause tracking and document management, this technology will ensure you have the organization, control and simplification you need to account for the new FASB standards.
- Gather all of the lease data in your portfolio. How are you currently organizing all of your lease data? Do you have all the data you need for FASB compliance? You need to know certain information about each commercial real estate lease moving forward, such as commencement date, when the renewal notice was signed, any impairment charges, etc. This may take a tremendous amount of effort and time, but it doesn’t have to with the right CRE software.
- Create a timeline. Now is the time to create a transition and implementation plan. December 15th may seem like a long way away, but it will be here before you know it (and you’ll have to do twice as much work if you aren’t prepared for it). You might even want to consider creating a transition team to help you develop a timeline for compliance efforts.
FASB Transition Phase Checklist
Once you have an appropriate FASB compliance plan in place, you can immediately complete several tasks that will begin your transition. Here are a few of them:
- Make sure everyone is on board. Don’t make this FASB prep a solo effort. The changes coming down will affect multiple departments in your company. According to a recent article from the Journal of Accountancy, “under the new (FASB) standard, lease terms can have significant repercussions for an organization’s financials, so… (there’s a) need to educate all the players — including procurement, real estate, IT, and legal — about the potential for negative impacts of particular lease terms.” Make sure everyone affected by FASB changes are not only aware of them, but active participants in the preparation, transition and implementation phases.
- Start rethinking your lease negotiation tactics. FASB updates aren’t just going to affect the back-end of your operations; they’ll directly impact your lease negotiations as well. With the new FASB leasing standard updates, clients will seek increasingly shorter leases. As a CRE professional who values stability and predictability, you need to know how to either negotiate for longer-term leases (despite the extra accounting efforts they require), or accept the uncertainty that comes with shorter lease terms.
- Establish and document FASB standards. You also need to make sure you have the FASB leasing standards documented and visible for all affected parties. You need to be able to answer client questions about the changes, so it’s important to make sure your company is compliant with them and that they’re easily referenceable.
FASB Implementation Phase Checklist
Finally, as the execution date for new FASB leasing standards gets closer, you’ll want to prepare for fully implementing them. By now you should hopefully have prepared for them and started your transition as a business, but you’ll need to consider the following as well:
- Renegotiate current leases, if needed. Do you have any existing leases that will be affected by new FASB leasing standards? It may be time to consider reevaluating your terms, as you’ll need to provide extra documentation and account for lease payments appropriately on your balance sheets. This will mainly apply to any leases you have that are long-term agreements.
- Ensure FASB standards are enforced internally. Ongoing compliance is just as important as initial compliance. Hopefully by now you’ll have FASB standards documented, but you want to make sure you have the right technology backing you up (as well as your data, documents and reports). CRE software like Quarem not only provides the powerful technology to accomplish this, but a team behind it that is well-versed in new FASB standards and will train you on how to maintain it properly with the software.
- Standardize reporting. The FASB states that “organizations will want to explain the effects of the changes in accounting for leases on the organization’s financial statements to boards of directors, investors, and other users of financial statements.” By standardizing your reporting (hopefully through customizable CRE software dashboards), you’ll ensure there are no gaps in compliance.
- Think about your long-term plan. With all of this preparing for FASB changes and developing a transition or implementation plan, it can be easy to forget about your long-term plans. Also, with just the nature of new lease structures moving forward, you might be under the impression that you can’t even think about the long-term future. Either way, a CRE software solution like Quarem can help you by addressing your operational inefficiencies and providing the accurate, insightful, valuable benchmarks you need for future planning.
Ultimately, the biggest box you can check on your FASB lease accounting checklist — one that will make all the other steps easier — is implementing a CRE software solution like Quarem. If you’re interested in seeing the tool in action, request a demo today.