IBM study shows nearly 60% of companies need new or upgraded EAM and facilities management systems
John Clark 27000476SU firstname.lastname@example.org | | Tags:  iasb/fab survey software eam lease study facilities-management accounting
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Presently, operating leases do not appear on company balance sheets even though, for many companies, these lease obligations are the single biggest category of long-term liabilities. This creates a problem because balance sheets are supposed to provide a snapshot of a company’s financial position. Failing to account for these lease obligations on the balance sheet leaves a big gap in the complete disclosure of a company’s financial position.
To rectify this gap, the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) – accounting standards boards for the US, Europe and many other countries – are jointly developing a new accounting standard, expected to be released in 2012, that requires all publicly traded companies to add billions in new assets and liabilities to their balance sheets.
While no global analysis of the impact exists, the U.S. Securities and Exchange Commission (SEC) estimates the impact on publicly traded companies in the U.S at nearly $1.3 trillion dollars. For certain lease-intensive industries such as retail the new rules will add up to $35 billion in new assets.
Yet, ninety-two percent of companies considered themselves NOT WELL PREPARED according to a joint IBM and CFO Research Services study that assessed the impact of the proposed lease accounting standard announced today.
So, what are the realities that you need to consider?Most mid- to large-sized companies manage thousands of real property and equipment leases or more off the balance sheet and anticipate a significant operational impact to their real estate, asset management and finance functions.
According to our study, 45 percent of respondents expect their current portfolio of real estate leases to add greater than 10 percent more assets to the balance sheets; while 36 percent of respondents expect their current portfolio of equipment leases to add the same.
Added assets and liabilities required under the new rules adversely affect some financial leverage and return ratios such as Debt to Equity Ratio and Return on Assets (ROA) for companies with large quantities of operating leases. See Figure 1.
Figure 1. Impact of proposed lease accounting standard on key financial metrics
Overall, a majority of respondents expect the new rules will dramatically affect their companies in some way and companies acknowledge the need for more information, new processes and new reporting requirements to comply with the new rules in a smart way.
What will I need to help prepare?
To prepare for these changes, nearly two-thirds of companies expect to implement a new system or perform a major upgrade to their existing lease accounting systems to comply with the new lease accounting standard, according to our recent survey results. Responsibility for meeting the new lease accounting standards typically resides jointly with financial and business leaders. Increasingly, real estate and enterprise asset executives and managers play a role, as do chief information officers. None operates alone, however. In meeting complex lease accounting processes and using them to create a business advantage, each executive and team will require new software solutions integrated across the enterprise – 60 percent anticipate new or upgraded enterprise asset management (EAM) systems, while 56 percent anticipate new or upgraded real estate management systems. See Figure 2.
Figure 2: Impact of proposed lease accounting standard on IT systems
In order for finance, real estate and asset management executive to comply with the new accounting standard, they must consider three things:
Address your lease accounting needs with IBM
As you evaluate lease accounting solutions to meet your goals, you will find that IBM lease accounting solutions accelerate preparedness with the new FASB and IASB lease accounting standard with pre-built spreadsheets and templates compliant with Open Standards Consortium for Real Estate (OSCRE) data standards for faster loading of lease information. They provide the necessary financial reporting to achieve auditable lease accounting with simple-to-use, pre-built reports and financial assumption management capabilities. And they help reduce or eliminate the need for under-utilized leased assets with advanced strategic facility planning capabilities. Click to view a two minute video of IBM's Lease Accounting Software