Lessons Learned from New FASB Standards

By John Salustri

COVID-19 hasn’t been the only disruptor of the commercial real estate experience. Years before the pandemic, the Financial Accounting Standards Board began tinkering with the way leases--meaning ALL leases--from real estate to equipment--are reported. The changes to corporate balance sheets sent the industry scrambling to be in compliance, even forcing corporate real estate executives not only to speak to, but often report to, departments that previously had remained foreign to them.

As IAMC 2020 Virtual Forum attendees heard in the workshop “ASC 842 Roadmap and Lessons from the Trenches” (which was among the most popular sessions), the road to compliance is indeed bumpy, but eventually, the path becomes more navigable.

Panelists sharing their stories from the trenches were:

•             Marc Betesh, Founder and CEO of Visual Lease and KBA Lease Services;

•             Matt Boehlke, Director of Real Estate Services for Xcel Energy;

•             Mirela Gabrovska, Principal of MBG Consulting Inc. (who moderated the session); and

•             Martyn Wallace, Director of Global Real Estate at PepsiCo.

As the session made clear, ASC 842 is FASB’s lease accounting standard that replaced the previous US GAAP standard, ASC 840. The good news is that in April of 2020, the board voted to “defer the effective date for ASC 842 for private companies and certain not-for-profit entities (NFPs) for one year.”

According to accounting firm BDO, “For private companies and private NFPs, the leasing standard will be effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. For public NFPs, the leasing standard will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.”

The decision to push back on deadlines was actually two-fold, first in recognition of the degree of difficulty. As one panelist pointed out, it was assumed that “new public companies would be better equipped to collect this data, but no one anticipated the level of difficulty.” The pushback was due as well to that other disruptor of normal business, COVID-19.

As the panelists pointed out, in addition to the good news of delays to compliance deadlines, the extension is a good thing since there’s still “a lot to learn,” much of which formed the bleeding edge of compliance for early adapters. So here (in no particular order) are the lessons learned, offered by the panelists to help those still coming up to speed to avoid recreating the compliance wheel:

Lesson #1: Make sure you have a lease-management system that can collect, store and manage all lease data. Remember, this has to include equipment leases, which may be handled by Procurement. It also encompasses embedded leases, which can be harder to find. As one panelist confirmed, for his shop, “Real estate now reports up to Procurement, which makes sense because now we’re singing the same song.” In part, that means a common language among all stakeholder departments. “One of the challenges is to find a way to standardize data across all leases.”

Everyone agreed that the tough upfront work leads to better reporting. Yes, it takes a mountain of work until all the information is in there, said one panelist. “It was a tough transition, but it put us in a good position going forward. My role is reactive to Finance, and they can now see everything going on in lease expirations and renewals.”

Which leads us to Lesson #2: Identify the data that needs to be extracted so it’s conducive to reporting. The must-haves here include, but are not limited to: Location; terms; possession and commencement dates (remembering that ASC 842 amortizes lease liability as of possession date, not lease-commencement date); rental streams; renewal options and cancellations; and tenant improvement allowances and other incentives.

Part of the challenge of setup is the sheer volume of material that now has to be shared and digested. A small lease can run hundreds of pages, so sending all leasing documentation, “to a group not used to reading leases can be a shock,” said one panelist. After some back and forth, the department receiving the documents settled on the essentials listed above. With all that data implemented, the concerned departments touch base quarterly for updates and the appropriate backup documentation.

Another part of the challenge is keeping all of that data straight, which is Lesson #3: Choosing the right technology. “It takes a long time,” stated one participant, adding that the software has to work for everybody, or you might end up with just an accounting system or a lease-management application. To sidestep that minefield, “It’s critical to have various stakeholders at the table.” And everyone should be ready to take a ”long journey, anywhere from nine to 12 months,” before an appropriate, integrated system is up and running.

And who are the stakeholders? Therein lies Lesson #4: Implementation. Typically, the Finance department will drive the process, but it should include “everyone from the CFO down,” which in turn means “a lot of groups that we didn’t interact with before. I didn’t know we had a Technical Accounting group. Now we’re best friends.”

As another panelist stated, this coming together of different agendas can lead to some gentle counseling: “Supply-Chain comes to you with one request, and Finance comes from the other end of the scale, and we have to be the broker in between.”

No, the path along the way to FASB compliance isn’t easy, demanding a virtually complete redefinition of lease reporting. But once those initial steps are complete, if they’re done thoughtfully and completely, reporting going forward will be more matter-of-fact, the panelists stated. But one way or the other, to return to the COVID analogy, it is the “New Normal,” and failure here is just not an option.