By Lucernex Real Estate Solutions Strategist, Mike Hammerslag, MS(RE), MBA, CPM®.
On August 30th, 2013 Gartner released a new research note focusing on the impact of the new FASB 13 changes titled “Beware the Effect of the Operating Lease’s Demise on Finance and Real Estate”.
Their recommendations include:
- “Corporate real estate executives who finance their portfolios with off balance sheet operating leases should ensure they have robust, accurate and automated real estate and facilities management systems to evaluate the impact of these significant accounting changes (see “Magic Quadrant for Integrated Workplace Management Systems“).”
- “Organizations should begin now to analyze the impact of, and best approach to dealing with, these accounting changes, as any lease term of three years or more will likely impact their balance sheet by 2014 to 2015 (when the likely two year parallel period [U.S.] will require comparative financials).”
Retailers are disproportionally impacted by these standards due to real estate typically ranking as their #2 expense. Many retailers have been holding out until the final FASB guidelines are fully approved and put into force. But there is no grandfathering of leases in the new guidelines so all existing leases will be impacted, including the expired leases of the earlier comparative periods. Retailers who wait to evaluate and replace their existing systems will very likely not be able to analyze, select and fully implement a new system prior to January 2015, the effective start date of the new standard – which means they will likely have to “resurrect expired leases” after getting a new system in place and potentially restate comparative prior periods.
Analysis of a new solution needs to ensure it is a robust enterprise ready system with enterprise level security and certifications. Furthermore, the accurate conversion of legacy systems and the proven calculation of all new financials needs to be a primary concern in selection.
The new FASB 13 rules also impact the type of system to be chosen. In-house systems, which use purchased or leased hardware, will now have to be fully capitalized on the balance sheet under the new standards. This makes Cloud and SaaS systems far more attractive as they can often be considered off-balance sheet operating expenses.
Shameless Plug
Goals in selecting a new Lease Administration system for Retail should include:
- Enterprise ready, SSAE 16 Type II certified (internal and data center operations)
- Cloud delivered to make it an operating expenses
- Start the selection now to avoid having to resurrect financial obligations
- Find a Lease Administration solution that is part of a complete Retail IWMS solution to enable a single solution for the entire store life cycle
- Talk to Gartner about your needs to get recommended vendors that fit your company
Lx Retail from Lucernex is the only Retail IWMS solution and the only true-cloud solution listed in the Gartner 2013 IWMS Magic Quadrant survey. The Lx Contracts module of Lx Retail is an enterprise ready Contract Management solution designed by retailers for retailers that is both ISO 9001 and SSAE 16 Type II certified. We have accurately converted every major legacy lease administration system.
