IAMC insider Two Worlds Converging –

Russell Burton
IAMC Chair

How New FASB Rules Are Forcing Finance and Real Estate Groups to Work Together

To provide the capital markets with better insights into corporations’ financial status, in 2016 the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) changed accounting rules so that in the near future, companies will show virtually all leases on their balance sheets. This simple — some would say elegant — solution initiated a planning and preparation process many companies are just beginning to understand.

Currently, some companies do not have a database that includes all lease documents. That’s required-fix number one. Further, the new standards reinforce the need for companies to identify and record embedded leases, which are contracts that, while not using a lease format, do however convey the right to use an asset. These are sometimes found in service agreements and other contracts. Also, companies will need new lease abstracts that provide the key decision-making information for managing leases within the new standards. CRE’s database software will need updating to accomplish much of the new lease administration work ongoing. And working arrangements will need to be established with other departments involved in the financial reporting process. This is a lot of work! Luckily, most of it relates to making the transition to the new standards and needs to be done just once, although some new reassessment requirements are included in the new rules.

The beneficial part of the new FASB-IASB leasing accounting process is that it will compel collaboration by the real estate and finance departments. Corporate staff units tend to guard their turf. But under the new standards, CRE staff will be engaged in providing lease data that after some manipulation will be published in the quarterly financial statements by another unit and contribute to Wall Street’s ongoing evaluation of the company. This is a bit of CRE-Finance integration and convergence that could have far reaching implications for CRE. Consider these:

CRE lease administration personnel will need to be well trained. And the internal process for the work will be subject to periodic audits. There’ll have to be a level of trust between the two departments. The reporting link between CRE and Treasury will have to be seamless. There certainly will be periodic cross-unit conversations requiring working relationships between elements of the two staff groups. And future staffing discussions involving potential outsourcing of aspects of CRE will have to account for CRE’s public reporting contributions.

Your professional association, IAMC, is deeply involved in supporting members to make the transition from the old lease accounting standards to the new. For instance, early in 2016 we convened the 12-person, multi-disciplinary FASB Lease Data Standards Task Force to document a process for getting CRE departments up to speed for the new standards. The working group included Active members, Associate member service providers and a public accountant.

The Task Force’s work has already served as input for a Cleveland Forum Research Roundtable and a workshop, two Indianapolis Forum workshops and a soon-to-be-published white paper. A few weeks ago, we set up another working group to learn about commercial services that use artificial intelligence software to abstract leases for the new accounting standard. This work will become a Tampa Professional Forum workshop in April.

Best regards,

Russell Burton
IAMC Chair

Pairing Cutting-Edge Technology and CRE Databases for Innovative Analytics and Reporting

Justin Chambers of ii2a

This article is excerpted from the Oct. 9, 2016, Indianapolis Professional Forum Research Roundtable program.

Overview

Thanks to today’s advanced technologies, corporate real estate is expected to undergo a metamorphosis. Dashboards are just the beginning — 3D models and virtual reality are revolutionizing site tours. Visualization tools, text analytics, and machine learning are streamlining decision-making processes and increasing corporate real estate teams’ productivity.

Context

Justin Chambers, Co-Founder, ii2a; Patricia Becker, Director, Account Business Intelligence Programs, Jones Lang LaSalle; and Shannon Blaylock, Analytics Technology Platform Lead and Business Relationship Manager, Cushman & Wakefield, discussed how various technologies can be used to support the corporate real estate sector.

Key Takeaways

Technology is transforming corporate real estate

Deloitte has predicted that thanks to technology, corporate real estate (CRE) will undergo a metamorphosis. Justin Chambers described several examples of technologies available today that can be utilized in CRE:

Remote site tours. With a $400 camera, it is possible to live-stream site tours to viewers in remote locations. Viewers can “steer” within the tour and see 360-degree views. Within the tour, viewers can tap and access “hot spots” with additional data.
3D models. Scanners, such as those sold by Matterport, can be used to create 3D models of buildings and land with dimensions accurate to 1 percent. With virtual reality goggles, it is possible to navigate a model remotely. Model data is stored in the cloud and can be accessed through an Internet portal.
Bluetooth low energy. This wireless personal area network technology can be used to personalize visitor experiences. For example, a traveler at an airport could approach a departure screen and the screen would automatically update with directions to the traveler’s gate.

Analytics and business intelligence tools are user-friendly enough for business analysts to use

Patricia Becker offered insights based on Jones Lang LaSalle’s experience with analytics:

Different tools are needed to support analytics.

Jones Lang LaSalle is utilizing tools to support analysis and decision-making in several different areas:

Global HVAC dashboard. Managing a dashboard for every property is too much for a single energy manager to handle. In response, a business analyst created a global dashboard that displays every HVAC unit and the number of hours of variance for each unit.

Facility utilization analytics. Some businesses measure utilization via occupancy. Companies that can quantify real-time utilization can decrease their real estate footprint, resulting in savings. Mobile sensors can be temporarily deployed in buildings, badge-swipe data can be collected, or observation studies can be used.

In corporate real estate, machine learning can automate the lease abstraction process and answer key business questions

Shannon Blaylock noted that machine learning is part of the data science field built on artificial intelligence theories enabling computers to learn without being explicitly programmed to do so. There are three types of machine learning:

Supervised. This relates to the classification of data.

Unsupervised. This relates to the categorization of data.

Reinforcement learning. This relates to the positive identification of sequential events.

In CRE, machine learning can automate the lease abstraction process, resulting in faster cycle times, fewer errors, reduced risk and a more robust audit capability. New FASB standards enforce the need for better accuracy of lease document abstraction.

Taking the Post-Election Business Pulse

Tate Godfrey, Executive Director of IAMC

Fresh off the 2016 presidential election, whose results surprised most in the US, if not the world, we surveyed IAMC corporate real estate executives on how the results might affect their work. While no stunning insights were revealed, the results are nonetheless compelling. Many of the IAMC member companies are reassessing their global location strategies as the new administration continues to refine and prepare to implement new policies related to the economy.

Question 1: The incoming administration has promised to reform the US federal tax system and to reduce taxes on corporations. What do you think is the most likely outcome with respect to current corporate taxes?

Commenting on this, one respondent expects “a modest reduction in corporate tax rates, with less deductions to keep the effective tax rate the same or slightly lower.” Another said, “Congressional and senatorial grid-lock will likely continue. However, we have paused major international projects in anticipation of possible changes.” A third said, “I expect some changes that will encourage companies [to] remain based in the US.”

Question 2: The current US unemployment rate is 4.6 percent. Many companies have difficulty finding qualified workers. If the new administration reduces immigration as they have promised to do, how will this affect your company’s ability to attract qualified workers?

On this, a respondent observed, “As a manufacturing company, the impact will mostly be indirect. This will have a major impact on the service companies, as jobs typically are entry-level or lower paying, and with lower immigration this will cause a labor shortage in this sector.”

Question 3: If the new administration undertakes the $1-trillion US infrastructure program as has been suggested, how would that most likely affect your company?

One corporate Active member said, “Ultimately, [I] don’t see $1.0 trillion passing Congress.” Another, viewing the election result as a glass half-full, noted, “This will increase demand for our products.”

Question 4: If the US backs away from the proposed Trans-Pacific Partnership trade agreement, how would this affect your company?

Overall, the written opinions tended to take one or the other of two directions. Representing the optimists, one said, “The proposed changes will require much debate in the House and Senate. The impact of decisions will be well-thought-out.” Speaking for the less optimistic, another thought, “The pending Trump administration caught everyone by surprise and, as a result, has halted numerous domestic and international investment projects until further information is available.”

But cautionary individual comments notwithstanding, we see optimism in the survey results. Even if the Trans-Pacific Partnership goes down, two-thirds of respondents believe this would have little or no effect on their companies. An almost identical proportion saw no threat to the workforce from reduced immigration, if that should happen. Three-fifths are looking forward to the incoming administration’s infrastructure initiatives. And over four-fifths anticipate some federal corporate tax reduction. We will continue to monitor our member companies as they adapt to a new administration and new economic policies, but for now at least, there is certainly cautious optimism that could translate into more investment in the US.

— Tate Godfrey