New lease accounting standard implies the need for new strategies—and soon
"Forewarned is forearmed." That's a classic strategic guideline, and it's also one that applies well to facilities and real estate management.
This area is about to experience a significant shift for which companies have been forewarned but, it turns out, aren't very well forearmed in the huge majority of cases.
What kind of shift are we talking about? Pending changes in the rules regarding how building, equipment and other leases are handled in accounting. The U.S. Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) —accounting standards boards for the U.S., Europe and many countries—have proposed that operating leases move from the income statement to the balance sheet as a capital asset and liability.
A new global lease accounting standard—likely to be finalized this year—implies a world of change to companies that maintain large or distributed sites. Among other complexities to ponder, for instance, debt-to-equity ratios will be significantly affected in most cases. Debt covenants, too, may be triggered and increase the cost of financing.
There are also larger business implications than those of accounting. When it gets harder to make smart decisions concerning building and other leases, it similarly becomes harder for companies to grow or shrink in proportion to their business needs. Opening new sites (when business is good) or moving from larger sites to smaller sites (when business is not) becomes a slower and more cumbersome task. Business agility, in general, gets worse.
All of that falls under the heading of forewarned. What about being forearmed?
Well, a new study sponsored by IBM and conducted by CFO Research Services suggests that while companies are typically aware of the forthcoming leasing rule changes, they're also not prepared to cope when those changes arrive.
The survey polled 179 senior executives of companies with more than $1 billion in revenue and from different regions around the world, and found that 92% of respondents—a staggering total—consider their companies not adequately prepared to capture, organize, analyze, and report on the probable balance sheet impact. And even that would only be half the job; following analysis, they would also need to create and carry out new strategies designed to minimize the negative impact of the rule changes, while still supporting changing business goals through optimized facilities management at all sites.
Toward resolving this challenge, companies—particularly the largest and most multinational ones, with multiple sites comprised of multiple buildings—will require a new approach and new IT systems. In its survey, CFO Research Services found that 58% of executives anticipate new or upgraded enterprise asset management or real estate management systems to comply with the new lease accounting standard.
Enhanced visibility, control, and automation of real estate assets at a time of change
Fortunately for them, IBM's industry-leading integrated workplace management capabilities extend to this area as well—thanks in part to a key 2011 acquisition.
In April of last year, IBM closed its purchase of TRIRIGA, a top-tier provider of integrated workplace management systems with a specific focus on real estate assets. The basic value proposition of IBM TRIRIGA: help companies collect and analyze information pertaining to buildings and campuses at every phase of the real estate lifecycle; including leasing, facilities and project management, construction/design, and related subcategories such as space, maintenance, and energy optimization.
"IBM TRIRIGA solutions include advanced visibility of current performance as well as future modeling, used to illustrate and quantify how different transaction strategies might be expected to perform. That kind of crystal-ball insight, in turn, accelerates and optimizes the process of arriving at the best-possible strategy to pursue in real estate transactions."
With the TRIRIGA portfolio of solutions, in other words, IBM brought to real estate asset management the same power it had already brought to IT infrastructure asset management: the power to maximize the efficiency of assets, as long as they're in use by the company, through centralized information aggregation and analysis, and subsequently optimized business processes and strategies.
Just as IBM Tivoli solutions accomplish that for assets like business applications and production servers, IBM TRIRIGA solutions accomplish that for assets like buildings and equipment.
Minimizing the impact of the new accounting rules changes
Does that help address the new lease changes proposed by FASB/IASB? It certainly does.
Imagine, for instance, that a company is at a decision-making point in its real estate management. Perhaps it wants to consolidate operations from multiple sites into one, because some of those sites are underutilized or the leases involved aren't particularly favorable. Making that happen will mean considering the leasing terms associated with all of those various sites (as well as many other factors) to determine which will be best suited to serve as the new, consolidated site. This company will have to collect all the relevant information from all of those sites into a central repository, analyze it in different ways, and weigh the results of the analysis against goals and risks, and now the balance sheet impact. Only then can it make the best possible decision.
This is exactly the sort of scenario for which IBM TRIRIGA solutions deliver tremendous value. They effectively integrate not just the many types of information pertaining to real estate assets, but also the analysis and management of it. They accomplish this via a unified database, common workflow tools, executive dashboards that present key metrics in clear and intuitive ways, and an extensive, customizable range of reporting capabilities.
And IBM TRIRIGA solutions have also already been updated to take into account the proposed FASB/IASB rule changes. That means the value they create extends not just across space and other leased assets—all real estate holdings, at all sites, and across all asset categories—but also time.
IBM TRIRIGA solutions can help your company understand how the proposed rule changes will apply in your particular case when they go into effect in 2015, consider different possible scenarios you might pursue in minimizing their unwanted business impact, and eventually arrive at an optimized strategy tailored for your particular real estate assets and total business context. By the time the changes become reality, you'll long since have addressed them.
Directly relevant IBM TRIRIGA capabilities in this area include:
Making smart decisions about real estate transactions is key to total business success for the largest companies, at which real estate costs are typically among the top four of all costs in all areas. Yet it's far from easy to optimize such decisions, thanks both to the incredible volume of information involved, as well as the difficulty weighing and prioritizing it against the company’s complete context.
Fortunately, IBM TRIRIGA solutions include advanced visibility of current performance as well as future modeling, used to illustrate and quantify how different transaction strategies might be expected to perform. That kind of crystal-ball insight, in turn, accelerates and optimizes the process of arriving at the best-possible strategy to pursue in real estate transactions.
In a perfect world, lessors such as real estate landlords would comply with lease terms in a perfectly consistent and accurate manner. Such, however, is not usually the case in the real world. That means lessees must be proactive in determining whether, and to what extent, lease terms haven't been fulfilled in such areas as common area maintenance and utilities.
IBM TRIRIGA solutions deliver a fast and accurate evaluation in this area by comparing the dates and sums of invoices against lease terms, helping companies avoid paying too much—and freeing revenues for more strategic investments, like creating and rolling out new products and services.
Because the pending FASB/IASB rule changes will require moving real estate and equipment leases to the balance sheet as a capital asset and liability, companies will certainly need workplace management systems capable of recognizing all such instances and implementing the necessary accounting shifts. They'll also typically need to become more accurate, to avoid eventually needing to make a financial restatement.
IBM TRIRIGA's comprehensive modeling features and information aggregation/analysis are directly on point in this area. They deliver ongoing, up-to-the-minute insight into different lease terms (spanning both real estate and equipment) and can assess the probable impact of the pending rule changes as well.
Then, by portraying different scenarios—"Should we renew these leases, but not those? What if we consolidate these two sites into this one?"—IBM TRIRIGA solutions can create an optimized strategy to minimize the total negative impact of future accounting changes.
Added up, IBM TRIRIGA capabilities can thus make a real difference in the way companies handle decision-making in their real estate strategies—not just pertaining to FASB/IASB rule changes, but in a larger, more complete sense as well. And in some cases, that difference can be a really spectacular one.
One IBM client specializing in global manufacturing found that by deploying and utilizing IBM TRIRIGA in this way, it was able to save an estimated $925 million—almost a full billion dollars—to make more informed business decisions about its global real estate portfolio.
That's the kind of dramatic, quantified improvement that would be welcome at practically any company, particularly in a budget-challenged, unpredictable economy like the current one.
Where's IBM TRIRIGA? Right there—in Gartner's coveted Magic Quadrant
It should come as no surprise, then, that Gartner recently singled out TRIRIGA as a leader in its area.
In the latest report on integrated workplace management systems, TRIRIGA was placed in the Leaders quadrant of the Integrated Workplace Management System Magic Quadrant and cited for having not just the leading vision/innovation, but also the leading execution of that vision through its specific features and functions.
In particular, TRIRIGA's green energy management capabilities—designed to drive down both the carbon footprint and energy costs of all sites a company maintains—were praised. So too was the fact that TRIRIGA has an early jump on alternate solutions in having already addressed the forthcoming FASB/IASB rule changes at a deep level.
By giving clients superior real estate management and lease accounting insight not just into the present but also the future, IBM TRIRIGA helps companies better prepare for that future, implementing today the changes they'll need to get a better business outcome tomorrow.