The Financial Accounting Standards Board (FASB) has introduced significant changes regarding how multi-unit operators identify their lease arrangements. Rather than simply stating lease expenses on the financial statement, as currently required by the U.S. Generally Accepted Accounting Principles (GAAP) standards, operators must soon include real estate lease assets and liabilities on their balance sheets. This ranges from leased retail space to rental equipment.
The new guidelines, which take effect December 2018 for public companies and a year later for private companies, place a huge burden on operators to retool their accounting processes. For most companies, there is still plenty of time to make the necessary adjustments to meet the deadline and avoid penalties, if they start now. Below are a few considerations to help get the ball rolling in your organization.
- Assemble a FASB team – While accounting representatives are obvious members of this group, don’t forget to include people from finance, real estate and the legal department. You may even recruit someone from communications to help educate the rest of the company about the importance of the new requirements and processes.
- Educate yourself on the requirements – The new rules are far more complicated than the current ones, so at least a few members of your team should have an in-depth understanding of the requirements. The rest, however, only need to know the parts that pertain to them. If you haven’t begun your research, the FASB site is a great place to start.
- Create a realistic timeline – While the FASB deadline may seem like a lifetime away, having a realistic timeline will help avoid the last-minute panic, which could prove costly in many ways.
- Evaluate your reporting technology – Excel spreadsheets are simply not sufficient for FASB reporting. If you’re already using real estate management software, now is the time to see if it’s up to the challenge. A few software solutions include FASB calculations, but the majority do not. If you need to make a change, do it sooner rather than later so you can proceed with the following steps.
- Assemble all lease and property data – FASB requires a more in-depth analysis of lease data than ever before, so operators must pay special attention to items like options, rent escalations and tenant allowances. All documents relating to the leases, like amendments, correspondences and appendices, must be readily available.
- Conduct a lease inventory – According to the new FASB guidelines, a signed lease implies that you’ve purchased the right to use an asset, so everything must be accounted for—even non-real estate items like leased kitchen equipment. Appoint someone on your FASB team to ensure that all leases are in hand.
- Review lease terms – While most companies will not include lease renegotiations as part of FASB preparation, it does present a good opportunity to ensure that lease terms, particularly the options, are balance sheet-friendly. Under the new guidelines, for example, consider whether it’s in your best interest to convert two 10-year options into four 5-year options.
- Ensure lease data is easily searchable – For the data to be useful, it must be properly abstracted into a software platform that is easily searchable within seconds. This also is critical when preparing the new financial statements, which drastically differs from the current ones.
If you’re a Property Works client, a FASB module has been integrated into the software at no additional cost. This allows previously abstracted lease data to be seamlessly gathered so FASB-compliant reports can be compiled to meet the deadline. For more information and training, simply contact your relationship manager.
If you’re not a Property Works client, but would like to see how our FASB solution can meet your needs, contact Karla Finnegan for a no-obligation demo today.