NEW YORK CITY—The long-awaited date has arrived, or at very least is finally on the calendar. Starting on Jan. 1, 2019, lessees must bring nearly all leases onto their corporate balance sheets under new lease accounting standards adopted domestically by the Financial Accounting Standards Board and globally by the International Accounting Standards Board. That date may be more than two-and-a-half years away, but companies are already assessing their corporate real estate strategies, experts from PricewaterhouseCoopers tell GlobeSt.com.

“Everybody's been expecting it for a long time, and it's finally here,” says Byron Carlock Jr., Dallas-based real estate platform leader at PwC. Partly because the change in the accounting standard has been on the horizon for so long, “most people are ready for it.”

Carlock describes the change as “an accounting exercise to bring the information from the footnote into the balance sheet recordation”—an accounting exercise, that as a new report from PwC puts it, “will continue to require significant judgment” under the new standard. “It's an opportunity for companies to re-evaluate the real estate on their balance sheet, from an owned and leased perspective,” he adds.

At PwC, Carlock says, “We're seeing a lot of client activity as they sort through their leases to determine what they plan on keeping or renewing, and what they'd like to get rid of in terms of both leased and owned real estate. It's an exercise in taking inventory of what they have, in addition to figuring out how they're going to account for it.”

This past February, FASB and IASB introduced their new standards—which, unfortunately for multi-national corporations, differ in key respects, according to PwC. Another area in which PwC sees a difference with this new standard is clients' more forward-looking response to it.

“One thing we often find with any new accounting standard is that companies may take some time to digest the standard, and then maybe wait until closer to the actual effective date to begin implementing it,” says Sheri Wyatt, managing director, capital markets and advisory services in Chicago. “We saw that with revenue recognition, for example. But what we're seeing in lease accounting is that companies are starting to think about it a bit sooner than many of us would have expected.”

It's not, she adds, “because the accounting is overly complex.” Instead, she attributes their proactive attention to “the strategy decisions that companies may want to consider with their overall corporate real estate, and also the data challenges and system challenges that companies may face in putting these leases on balance sheet.”

Carlock includes the new lease accounting standard with “two or three things that are converging at the same time. It happens to come at the same time that the capital markets are really forcing people to look at their real estate on their balance sheets, in the form of various monetization activities. And you have activist investors forcing companies with heavy real estate exposure to break up that exposure, sell what they don't need or might realize value from. This change in the standard has just accelerated the discussion.”

The question of whether a company should lease or own the real estate it occupies is answered on a case-by-case basis, says Carlock. “We're seeing global companies try to be as efficient as possible in their established market footprint while investing in growth in the emerging markets,” he says. Some occupiers are debating “whether they should own their headquarters long-term versus selling it into the sale-leaseback market and having flexibility to make an operational change in the future. Then you have some people say that their real estate is part of their identity and it's very important to their strategy.”

As was mentioned at the outset, January of '19 is more than two years away, yet Wyatt stresses the importance of getting a jump on implementing the new procedure. “While the standard is effective in 2019 for public companies, they will have comparative reporting in their '19 financial statements that would reflect 2017 and 2018,” she says. “So although they won't be reporting for '17 and '18, setting up the process to accumulate the data and start getting systems in place, so that maybe you're doing a bit of dual tracking, will make you better prepared for the go-live date of 1/1/19.”

She adds that “system implementations take a long time.” Therefore, starting early to identify data gaps and understand what the occupier's business requirements will be for a new system “will be critical in identifying what the right system solution is going to be for you.”

Instant Insights /

Time for Occupiers to Re-evaluate Their RE

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