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Rob Wood

 
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IFRS 16: What you need to know and the likely impacts on corporate real estate

By now the term for the new financial accounting legislation IFRS 16 will already be an established part of the day to day terminology for most, if not all real estate departments. By eliminating nearly all off-balance sheet accounting for lessees, it stands to have a direct and significant impact for any Corporate Real Estate professional, and arguably will influence their longer-term strategy in regards to real estate leases and tactical use of flexible space, such as serviced offices.

These imminent changes, of how a company should recognise, measure, present and disclose leases, is a focus of many current conversations within our network.  As we know, currently, most businesses account for finance leases on-balance sheet and operating leases off-balance sheet (financial activity that is not included on their balance sheet). However, EU legislation was passed last year for the introduction of new IFRS 16 accountancy rules, which state that as of January 2019, nearly all lease contracts need to be recognised on balance sheets as assets and liabilities. In summary, a business can no longer benefit from leasing an asset, as opposed to buying the asset and borrowing the purchase price.

It is a significant change, some financial experts arguing the biggest in 40 years in fact, which will affect all types of businesses across all sectors. Virtually all industries use leases in significantly different ways. For example, a professional services firm leases cars and corporate offices; a utilities company leases power plants; a retailer leases retail stores; and an airline leases aircraft, meaning these leases will vary in terms of frameworks, terms, pricing and volume and subsequently, varying implications will apply when the new standards are applied from IFRS 16. However, it is clear that all companies who lease could very well be affected, from those that rent offices to fleets of aircraft, and from company cars to computers.

Nonetheless, the attraction of leasing remains the same. For example, the benefit of having exclusive use of whatever it is your leasing, but without any of the ownership responsibilities and, of course, a much lower upfront cost. This indicates that business processes and strategies will need to be considered.

So, what are the key business considerations?

Companies will need to assess their current leases and understand whether they fit into the newly redefined definition of ‘lease’ under the IFRS 16 rules.

Data integrity is key here. Data identification, data abstraction, calculation, and ongoing management are the fundamental tasks that every business will need to carry out in order to achieve full compliance. In essence, it will be very difficult to produce accurate final reports without well-managed, up-to-date lease information, ensuring everything is numerically accurate and entirely auditable.

IFRS 16 also gives businesses the chance to reassess any poor practice and establish protocol that will ensure financial transparency, not only in time for January 2019, but for the foreseeable future. With the deadline fast approaching, and severe consequences for failure to comply, the need for clarity is essential.

So, what are some of the options when it comes to corporate real estate?

  • Leases with a term of 12 months or less, and containing no purchase options, are exempt from the IFRS 16 ruling. Therefore, you may lease real estate, providing the lease term is less than 12 months – Clearly the challenge here will be finding landlords to agree to a short-term lease of 12 months
  • Utilise flexible space such as serviced offices. These solutions are not affected by IFRS 16, meaning the agreements are not accountable on the balance sheet
  • Consider managed space. Benefit from your own private and bespoke offices by outsourcing everything to a managed office provider

Offices iQ clients rely on us to find flexible office space for them around the world. Whilst the size of these requirements varies from 1 desk to 500 desks, more recently these requirements have increased in size and length of term to avoid the implications of IFRS 16.

Clearly, it is rare to find flexible space for 500 people sat empty. Whilst we have always been able to find and arrange a flexible agreement direct with landlords, more recently our global network of serviced office operators have supported these larger requirements. In summary, based around your requirement, we find a building and match this with a serviced office operator wanting to move into the area. The operator secures the whole building for a number of years, allowing you to accommodate the ideal space for your ideal term. 

The benefit of partnering in this way is the flexibility to upsize and downsize with the operator, rather than being tied to specific space with a landlord, even if the agreement is not a lease.

Of course, accounting for the legislation IFRS 16 brings is not the only benefit of this solution. The inherent benefits of serviced offices still apply:

  • Ability to upsize and downsize
  • Only pay for the space you use, when you need it
  • One fully inclusive monthly invoice
  • No resources required to operate the building
  • Fit out bespoke to your requirements
  • Utilisation of community coworking space
  • Location to attract talent
  • Speed to market or implementation

So, if you have larger requirements anywhere around the world, it is always worth exploring these with Offices iQ. We are also interested in your surplus space to fulfil some of the requirements we discuss above.

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