|Changes to accounting rules will force all operating leases to be capitalized, accelerating the need to reduce underutilized and unallocated real estate. Measure and plan now so the final impact on the balance sheet is minimized.|
How will FASB 13 changes affect the balance sheet
Upcoming changes to lease accounting rules will have a major impact on U.S. companies and will impact return on assets and other key financial ratios significantly. Treating lease obligations off the balance sheet has helped to buffer real estate performance, but that will likely come to an end as early as 2011.
"The rule update could, by some predictions, move hundreds of billions of dollars in assets and obligations onto their balance sheets." -CFO.com
"Capitalizing operating leases will, of course, impact lessees’ ratios, even though their financial health remains unchanged. Lessees also can expect to incur costs associated with rearranging capital structures and avoiding technical default on outstanding debt." -AccountingWEB
How to prepare for and reduce the impact
Office vacancy rates and under-utilization directly contribute to impaired assets. The closer you get to a perfect efficiency measurement of revenue-per-square-foot, the less impact those impaired assets will have when the accounting rules change.
"The most significant impact of the proposed approach is the likely gross-up of the financial statements for both lessors and lessees; however, the impact likely would be most pronounced for lessees with operating leases." -KPMG
LEAN the infrastructure, eliminate underutilized space
Implementing a system to track actual usage of space and eliminate underutilized space will reduce impaired assets and yield higher efficiency metrics. The measurement of actual use of space can be completed quickly. The real metrics from your own offices gives you the power to renew your leases for the correct amount of space, much more so than the use of industry rules of thumb.
As mobility of the workforce increases, the benefits of supporting them with shared space while trimming off unproductive space to reduce financial impact makes more and more sense.
Perfect Storm Podcast
Listen to John Vivadelli's "Perfect Storm" podcast from The Alter Group