New Challenges Managing Global Portfolios

As many large international companies are learning, the conversion to ASC 842 and IFRS 16 was not a process that ended with the transition date or first annual reporting cycle. In addition to dealing with both US GAAP and IFRS reporting, the underlying challenges of maintaining accurate data, reconciling financials, dealing with different languages and varying local laws adds more complexity to the process of global lease accounting.

Prior to dealing with the new lease standards, many US-based multi-national companies operated in a highly decentralized model with businesses grouped by region or country. Financial reporting was consolidated through the accounting function and most operating decisions were made at a local level. For the most part, leasing was treated as a local decision and each region or country managed their lease information to suit their specific needs. With most leases classified as Operating, there was very little rigor placed on the completeness, consistency or accuracy of underlying data, since the fixed and variable payments all had the same Income Statement effect and no Balance Sheet impact.

With the new Standards, the Balance Sheet implications and the need for centralized, timely reporting, new challenges have arisen and they include the following:

  1. Language – Most multi-national companies use English as the standard cross-border language within the company. However, with many of the underlying agreements in local language, corporate staff and auditors based in the US or around the world cannot read the supporting local language contracts. Moving towards more standardized bi-lingual contracts and utilizing advanced translation technology can help overcome these challenges.
  2. Currency – Most of the new Lease Accounting systems can handle multiple currencies. What they do not handle so well (or at all) is certain situations that can arise related to currency variations within a contract. That is a situation where there might be multiple currencies in a contract (e.g. Base Rent paid in US Dollars and operating expenses paid in Brazilian Real). In other cases, there are local customs where the contract rent could be in one currency (e.g. Euro) but the actual payments are made in another currency. Managing exchange variations each month can be a high-effort, low-value exercise, but absent making monthly adjusting entries, getting the numbers to fully reconcile becomes extremely difficult.
  3. Statutory Rules – In a number of countries there are statutory laws that dictate the rights and obligations of Tenants and Landlords around a number of issues. Automatic renewals, rights to terminate, and rights to assign or sublet are often subject to these country or local laws rather than the letter of the contract. There are a number of cases where local operating units have let contracts lapse and relied on these rules to govern their tenancy. In addition to potential risks of occupying a property under an expired contract, the assumptions on “likely term” for accounting purposes can be clouded by these local rules.
  4. Decentralized Data Management – Leaving maintenance of lease and financial data in a decentralized environment can lead to inconsistent processes and understanding. Staff turnover, cross-training and individuals splitting time across projects and tasks create risks to data quality and consistency.

In an effort to not disrupt the long term culture and business practices of a decentralized organization, many companies have tried to build a hybrid approach to maintain local responsibility with an overlay of centralized lease data management and accounting process. While in many cases, this is the only initial option given the diversity and complexity of the organization, this networked approach can be improved over time utilizing technology, best practices and improved contracting to address the challenges listed above.

For those who have been at the forefront of adapting to this new environment, this is the next frontier to help solve these challenges and improve the process for all stakeholders. As with other topics that we at Jackson Cross have discussed over the last few years, where there are challenges, there are opportunities for improvement in data reliability, timeliness and lower overall costs. More importantly, the vast amount of data now available provides significant business value in managing this substantial area of expense.

Jackson Cross Corporate Advisory Services