Proposed accounting rules from the U.S. Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB), expected to be finalized in 2012, will require a company's leased assets – such as real estate, vehicles and other equipment – to be added to their balance sheet as a capital asset.
This means S&P 500 companies, for example, would have to list the value of their leases on the balance sheet, weighing them down with an estimated average of more than $1 billion in new assets. The pending regulation has the potential to dampen their financial performance as expressed in debt/equity ratios and return on assets. The U.S. Securities and Exchange Commission (SEC) estimates the impact of these changes may approach $1.25 trillion dollars for U.S. publicly traded companies.(1)
IBM (NYSE: IBM) introduced new analytics software to help Chief Financial Officers and real estate executives accelerate preparedness for pending compliance rules for leased assets. More than 92 percent of senior executives surveyed in a new IBM study say they're not yet prepared to address these changes.
IBM today is issuing new software to help companies manage this major accounting change. IBM TRIRIGA software has new analytics that delivers visibility into balance sheet and income statement impact; financial assumptions and audit controls for both real estate and equipment leases; and automates management review and approval processes, specifically to help companies navigate the proposed regulation.
The new software also delivers strategic facility scenario modeling to increase return on leased real property assets. With a global view, the software can:
- Provide operational controls such as critical date alerts, payment processing and financial assumptions for leased real estate and equipment assets in a single technology platform.
- Provide balance sheet and income statement analysis of complex real estate lease decisions, such as 10 years with two renewal options versus 20 years, for instance.
- Help predict future demand for space and display gaps between demand and availability of real estate space.
These types of analytics are critical as an IBM study issued today shows 92 percent of those surveyed believe they are not prepared to implement the pending rules. The IBM survey, conducted by CFO Research Services, a research group sponsored by CFO Publishing, polled 179 senior executives from global companies with revenue in excess of US$1 billion.
Survey Highlights Lease Accounting Challenges
The IBM survey indicates the proposed rules will require considerable changes to companies' operating and finance strategies. Seventy-nine percent anticipate moderate or substantial changes to accounting policies, processes and practices, while a majority also expects related operational strategies for real estate (53 percent). Sixty-three percent of companies expect changes in information management systems to comply with the pending rules.
Specifically, the new survey, "Beyond the Balance Sheet: Opening the Book on the New Lease Accounting Standards" also found that:
- About half exhibit the most concern over worsening in debt/equity ratios and return on assets.
- Sixty percent say that they will need to make some level of change in planning, budgeting and forecasting systems, while half (49 percent) expect new or upgraded business intelligence systems.
- Sixty percent anticipate the need for changes or new software to enterprise asset management systems, while 56 percent expect to address real estate and facilities management systems.
- Seventy-four percent agree that their companies will need to conduct additional training to adapt to the new lease accounting standard.
- More than half feel they will need significant time to prepare for the proposed standards with 58 percent predicting six months to two years.
"As companies are hit with the new financial regulations, we see that most firms are concerned about their readiness to abide by the lease accounting changes," said George Ahn, vice president of Enterprise Asset Management, IBM. "We predict that the pending IASB/FASB regulations will spark companies to manage their leased buildings, vehicles and equipment as meticulously as they have traditionally managed their overall financial investment portfolio, with an increased focus on asset efficiency. At IBM, we have worked closely with progressive companies to understand the impacts, and are prepared and excited to help companies meet this new need."
Beyond compliance with the proposed regulation, IBM is broadening its reach by making its software available in global languages to increase productivity and ease of use for companies with worldwide operations. This globalization is the next step in accelerating IBM's growth in the smarter buildings market since the company's acquisition of TRIRIGA.
For more information on the lease accounting survey and IBM TRIRIGA software go to:
About the Proposed Lease Accounting Standard
The proposed rules are being released by the International Accounting Standards Board and Financial Accounting Standards Board, who are regulators for the U.S., Europe and many other countries.
Companies realize that compliance will take significant effort as it increases the complexity of lease accounting with new requirements for the management and tracking of financial assumptions of leased assets and real estate.
About IBM Smarter Buildings
Since launching its Smarter Buildings initiative in February 2010, IBM has created a portfolio of smarter buildings solutions that integrate with building automation software from across the industry. IBM's real-time monitoring and analysis, facilities and space management capabilities, and advanced dynamic dashboards helps property owners and managers reduce facilities operations and energy expense, and improve asset management and reliability. Through IBM's acquisition of TRIRIGA, IBM accelerated efforts to bring intelligence in the smarter buildings market. IBM's smarter building solutions help clients listen to data generated by facilities. By collecting, managing, and analyzing data IBM helps clients gain intelligence and insight to energy, space and facilities management. TRIRIGA strengthens IBM's smarter buildings solutions by adding key functions such as real estate, facility and energy management software solutions.
(1) U.S. Securities and Exchange Commission, "Report and Recommendations Pursuant to Section 401(c) of the Sarbanes-Oxley Act of 2002 On Arrangements with Off-Balance Sheet Implications, Special Purpose Entities, and Transparency of Filings by Issuers", page 64, http://www.sec.gov/news/studies/soxoffbalancerpt.pdf, 2005