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Preparing for FASC ASC 842 data requirements.

Our accounting experts discuss data gaps, re-abstracting leases to fill those gaps and uncovering all equipment and embedded leases – just some of the data challenges they face with the new lease compliance standards, and how to overcome them.

For more insight and content along the key stages to FASB and IFRS compliance, visit Tango’s Road to Lease Compliance Resource Center.

Transcript

Attendees:

  • George Elefther, Vice President, Real Estate Accounting – Bed, Bath & Beyond
  • Gabe Sugar, Director, Financial Planning & Analysis – Darden
  • Kevin Fossee, Director Advisory Services, Real Estate – PwC
  • Theresa Meier, Director of Accounting – Bed, Bath & Beyond
  • Rick Zelinsky, VP Product Strategy – Tango

Rick

First, I guess the good news is I think real estate data, lease data, has historically been pretty good for most organizations. Many of them are coming from some form of lease accounting software system that is effectively paying their rent. So, they’re data has to be right; otherwise, their landlords would be calling. I think what we’re finding from a data perspective is what we need to do, and what clients are doing kind of proactively is, “What’s the data I don’t have?” I think that’s really the focus, not the… I think the payments are in the rent stream are typically pretty good. What we see is what do they do about variable rental increases, CPI based or whatnot? Is there items in the contract that there’s a floor? Then that needs to be accounted for from a FASB perspective. There is some degree of kind of, “All right, which leases do I have that have a CPI type increase?” And then there’s some degree of research to gather that information if it doesn’t already exist.

There’s all the other kind of data that needs to augment it. “What is my likely lease term?” is a perfect example. We’re finding very consistently that that data is coming from another source. Somebody is gathering that somehow, some way, going through an analysis and saying, “These are kind of the end dates to use that define what our likely lease term is.” They’re not looking at it saying, “We’re just going to assume one option on every lease.” That’s what we’re seeing around the data, and then I think the non-real estate is really all over the board. We find that’s the most decent disaggregated and typically managed either in country and region, whatnot and that’s being pulled together in spreadsheets and really doesn’t have a system in many instances.

Bart

George, how about data on your site? Are you needing to go back and re-extract some lease information because you maybe didn’t have it in your legacy system that you do need now, or?

George

We have pretty much everything in our system right now, so that’s not too big of an issue. We have to look at our gross leases and decide on whether we’re going to separate the gross, but right now it looks like we’re not. We only have a handful of finance leases. Certain things are going come into operating, so on that part, it’s not a problem. Again, my concern is more of the leases we don’t know about. The retail space, it’s pretty good.

Gabe

Yeah. Same with us. As Rick said, the realistic data is pretty good. I mean for retailers, that’s your most significant line item is the occupancy. So we feel great about that data. It’s the equipment leases and embedded leases that we’re going to try to have to gather up and then figure out how to, how do we keep it going forward to make sure. We don’t want to take on the administration of all those different service agreements, but we will need the data fed to us going forward just from a reporting standpoint.

Bart

Kevin, completeness is one element, but then there’s all the tools around quality, cut-over.

Kevin

Yeah, so a few things. I do think the core data for real estate is generally good with most companies, right? Paying rent, unless you’re overpaying, then landlords might not tell you, but the structure of the data is one thing, right? If you look at how some of these systems need to do the accounting for what sort of was the lease before, and the record you had in a system can be different, can be five lease records now going forward. As we’re going through, excuse me, and some of our clients are doing a re-abstraction, as part of this, as the real estate leases. It’s a challenging process to get the more lease administration abstraction folks, in some cases it’s third parties, to recognize what’s that right of us asset, the unit of account that I need to be going down to for this as the structure of the data. And then some of the ancillary data you don’t typically have in your at lease admin system like IDC’s, obviously discount rate you’ve got to come up with. The process behind that, some of the accounting, you know straight-line accounting rent had been done separately before. So when you go through transition, what’s your remaining balances, how are you going to bring all this together? Definitely the equipment leases and other leases that’s, you know, that’s all over the place at a lot of, at every client I’m working with. Right? So I’m getting like we’ve talked about getting your, your handle around it is the first key step.

Then I think, to answer your question, so my, let’s say my clients that are approaching this from a more sophisticated perspective in the data, the level of data quality and review that’s happening is significant, right? I’ll give one example. We got a third party lease abstraction group that’s doing the abstraction and they’ve got their controls and review process. Then it comes into real estate. They review it from sort of the real estate perspective. Then they’ve actually got their accounting folks then looking at it, at least one or two level review there, and they’ve hired third parties, PWC in some cases, to say “take our 200 largest leases and then go in and do a review on top of all of that”. And you’d be shocked at how many data issues we’re still finding after all of those reviews.

I definitely think the multiple levels of review and look at this is going to be important. And we have had some of the auditors, internal audit mainly at this point, do reviews again, not on the ones that we refused, but on the other ones and found issues. Your auditor’s likely would have found these issues too. So I think the quality check is a big piece of it.