The past several quarters, new IASB and FASB lease accounting standards have been a hot topic for several Newmark clients. As Corporate Real Estate (CRE) executives begin to understand and turn their attention to the new standards and reporting requirements, many are realizing that their legacy lease administration processes and technology tools urgently need serious evaluation and overhaul. Innovative CRE leaders are even recognizing veins of opportunity amid the challenges - opportunity to realize enduring long-term benefits by carefully and thoughtfully addressing the challenges presented today.
One of the first steps toward a successful evaluation and overhaul of corporate lease administration practices and technology is understanding some of the potential benefits and risks likely to be encountered during the process. Most CRE executives are prepared to make (or allow Finance to make) a business case for new processes and tools in support of IFRS 16 and FASB reporting. They may be less aware of the significant benefits available beyond meeting financial reporting requirements as well as the potential risks of implementing an inadequate and/or quick-fix solution.
Below are two lists I use as high-level discussion-points with Newmark clients as they consider new global lease administration technology tools and process improvements. The first list highlights 16 common qualitative benefits to be considered and potentially prioritized before deciding to move forward. The second list discusses five risks organizations take when they implement an inadequate system.
16 Common Qualitative Benefits
Increased operational and process maturity. Achievement of a higher level of program development, quality of process, and CRE project support.
Value derived from performance and cost benchmarking. In decentralized CRE organizations, costs are typically hidden within many businesses. A centralized CRE management tool can give transparency to spending and support strategies for better CRE decision-making to create value.
Improved data reliability. A global system will help to ensure that CRE data is comparable across regions and divisions, and aligns with corporate and auditing standards.
Portfolio optimization. Provides baseline data as an enabler for portfolio optimization.
Enhanced performance measurement. Ability to more easily quantify and replicate best practices.
Improved compliance reporting. Risk avoidance of inaccurate straight-line lease accounting and overall reporting. Decreased likelihood of re-stated financial statements.
Timely CRE transaction delivery. Transactions can be conducted more efficiently, with key lease data automatically captured on a timely basis, and in a consistent manner.
Improved timelines for accounting entries. Faster capitalization, categorization of assets, results in depreciation recognized in correct time-period. Decreased number of adjustments required.
CAM cost avoidance. Potential cost savings of 1-2% by tracking and analyzing Common Area Maintenance (CAM) costs. Overpriced CAM expenses can be identified by comparing them to other properties and/or market norms. This may be especially beneficial in countries with fixed fee rent payments.
Lease escalation cost reduction. Potential 5% to 8% reduction in Lease Administration and Lease Escalation costs by implementing and monitoring best practices, including:
Improved critical date tracking for options, renewals, negotiated terms
Improved workflow and data exchange between lease administration with accounts payable can minimize staff research time, improve accuracy and timelines, and reduce lease escalation costs
Improved visibility in abnormal changes, timing opportunities, market vs. actual, and space measurements
Operational optimization. Potential 5% to 8% reduction in operating costs by managing processes more efficiently with workflow that can identify bottlenecks and improve internal and external coordination.
Decreased lease administration effort. Abstracting, inputting, and validating lease data typically requires several hours per lease. Depending on the chosen system functionality, input time could decrease 25 to 50%. Best practice workflow capabilities will reduce administrative effort and will ensure that important calculations and steps will get missed.
Decreased time required to prepare financial reports. Typical 10-20% reduction in time spent preparing 10-K reports feeds.
Decreased time required for IFRS 16 / IAS 17 auditing preparation. A system with pre-defined and centralized IFRS reporting and functions will significantly decrease effort and time required to prepare for IFRS auditing. Estimates range from 20% to 50% anticipated time savings, depending on pre-deployment data quality and level of automation. Decreased data entry equals time saved. Data is entered, updated, and reported in one spot, reducing cross-functional report production and aggregation efforts and time frames. No silo-d reporting.
Less time required to reconcile data with corporate accounting systems. Depending on chosen solution functionality, the ability to integrate with SAP or other corporate accounting systems can lower the error rate from manual entry of accounting data. Many market-leading integrated solutions have a standard interface to SAP. Costs for creating a new interface from a low-end point-solution or niche product can be very high.
Less cost for regional/local adaptations. A global, integrated system with best practice Lease Administration functions can decrease the effort of adapting / customizing systems and processes to multiple countries and country-specific regulations. Local standards and additional country-specific regulations may need to be accommodated, which can potentially end in high deployment and adaptation costs.
5 Risks of Inadequate Implementation
Financial audit delays. Auditors not signing off on financials due to inaccurate accounting of lease portfolio.
Restatement of financials. Corporations needs to determine whether their lease liabilities are material. If so, publishing the wrong data or having data gaps could mean a restatement of several quarters of company performance, with corresponding effects on shareholders and investors.
Capital requirements / lending ratios. IFRS 16 changes could impact covenant calculations and lenders will be looking for audited P&L statements.
Lack of adequate data for new reporting requirements. Existing data structure may not have sufficient depth to support all disclosures, measurement requirements and allow documentation of management estimates and assumptions.
Weak process. More robust processes may have to be put in place to identify the lease and non-lease components of contracts (e.g. maintenance, security or cleaning) as they have significant measurement impact.
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