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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 utilise 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-amortisation
declining pattern.
Under IFRS, all leases will impact earnings utilising the
interest-amortisation 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 realise
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. Centralised 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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