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US GAAP vs. IFRS – What’s the Concern?
Under the new lease accounting rules, all leases for
tangible property are going on the balance sheet. While
all companies will be affected by the impact on the
balance sheet, the income statement treatment will vary
depending whether the entity reports under US GAAP
or IFRS.
Under US GAAP, the measuring of expenses (income
statement impact) will utilize the dual reporting
structure of operating leases and finance leases –
the measurement of the P&L impact will be largely
unchanged from the current rules. The expenses for
operating leases will maintain a straight-line pattern,
while expenses for finance leases (formerly known as
capital leases) will maintain the interest-amortization
declining pattern.
Under IFRS, all leases will impact earnings utilizing the
interest-amortization declining pattern. This will have
the effect of front-loading expenses for leases that were
formerly treated as operating leases. Thus, the new
rules will have a negative impact on earnings when first
implemented for IFRS reporting entities.
What will the new lease accounting standards mean to
corporate real estate executives? They need to realize
that the accounting treatment of leases is changing
and, consequently, leasing activities will be more closely
monitored by the finance and accounting departments.
Communication and coordination between these two
functions will take on new importance.
TOP 10 WAYS THIS WILL MAKE AN
IMPACT ON YOUR CLIENTS
1. Transition Team: Corporate real estate managers will play a very
large part in, or lead, preparedness efforts. This may require the
formation of a transition team and the creation of schedules and
milestones.
2. New Internal Governance: Internal governance structure may
have to be adapted – corporate real estate managers will need
to work closely with Legal, Treasury, Accounting and Finance
departments.
3. Centralized Lease Database: Transitioning will require a
significant implementation effort. Lease data will need to be
airtight and more centrally controlled.
4. Lease Administration Software: Technology will be more
important than ever! Lease administration systems, for example,
will be vital to lease accounting compliance and on-going
reporting.
5. Equipment Leases: Corporate real estate managers may
be asked to manage equipment leases. This could require a
significant undertaking to locate and abstract equipment leases.
6. Lease Strategy: Portfolio planning and real estate decisions
(e.g., Lease vs. Own) will be more complex. Lease strategy may
require more lead-time; and greater scrutiny.
7. Streamlined CRE Processes: Real estate processes, procedures
and technologies will have to be updated to capture relevant
data, calculate financial statement balances, and to ensure that
management has adequate control over the financial reporting
process.
8. Playbook Updates: Real estate managers may have to amend
playbooks to incorporate revised workflow, as well as new
leasing policies, standard lease terms, covenants, and other key
clauses.
9. Key Financial Ratios: Finance/Accounting may coordinate
with real estate managers to evaluate the impact the new lease
standards will have on key financial ratios and debt covenants
to ensure that minimum threshold requirements are maintained.
10. Transition Budget: Budgeting for transition resources and
software is critical to avoid any unforeseen expenses.
IMPLEMENT
REVIEW
CORPORATE
REAL ESTATE
STRATEGY
6 7
2018 Actions
PETE BROHOSKI
Senior Managing Director
Global Occupier Services
PAUL FRY, MRICS MCR
Partner, Occupier Finance
Strategic Consulting, EMEA
Global Occupier Services
NICK SEATON, MRICS
Director, APAC Portfolio
Administration
Global Occupier Services
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