How advanced technologies can help finance executives prepare for the next generation of corporate real estate regulation

Thack Brown of SAP discusses the three critical steps that must be taken for CFOs to ensure they are prepared to face new challenges relating to corporate real estate

Corporate real estate represents the second-largest expense for organisations today, but many financial leaders are still lacking the tools and techniques to manage leased space efficiently. In today’s digital era, all organisations are facing an increasing amount of data, and archaic manual processes that rely on spreadsheets are falling short in providing a holistic view of real estate assets.

Within organisations, any location used to support primary business goals, including offices, factories and warehouses, falls under the umbrella of corporate real estate. While many organisations typically have a global facilities manager responsible for maintaining these spaces, often the CFO or other finance executives are tasked with efficiently allocating and managing corporate real estate assets to generate ROI, while also making sure that their organisation is abiding by current industry regulations. In the face of upcoming changes in leasing regulations under IFRS 16 and US-GAAP ASC842 set to take effect in 2019, financial managers are facing more pressure than ever to streamline processes and improve efficiency when it comes to corporate real estate. For CFOs and other finance executives, there are three critical steps that must be taken to ensure they are prepared to face new challenges on the horizon.

Ditch the spreadsheet

Maintaining a holistic view of all the data aggregated around a company’s corporate real estate portfolio, including lease terms and service agreements, can be a major challenge for finance teams who have yet to embrace digital tools. This is especially difficult for global organisations who operate across multiple properties, making it is physically impossible for the CFO to see every site that the company maintains. By moving beyond the traditional spreadsheet model, CFOs can develop a clear vision of the company’s real estate assets to understand the costs and investments accrued through every lease that the company holds. By embracing cloud technologies and automation tools for managing real estate assets, finance and corporate real estate teams can drive agility within their organisation and ensure that they are keeping track of the real-time value of all global real estate assets in a way that keeps up with the speed of business today.

Leverage machine learning and automation technologies to prepare for regulation changes

Under today’s lease accounting standards, organisations are only required to recognise lease assets and liabilities on the balance sheet for assets managed under capital leases, but not operating leases. However, a 2005 report from the U.S. Securities and Exchange Commission found that a lack of lease accounting requirements led to $1.25tn of off-balance sheet operating lease commitments in the U.S. This discrepancy led to the Financial Accounting Standards Board’s (FASB) issuance of an Accounting Standards Update (ASU) in February 2016, which will require companies to recognise assets for operating leases on their balance sheet. Effective 1 January 2019, this update will require CFOs to generate and manage significantly more financial postings for all real estate assets – creating a major shift for financial organisations. CFOs will now be tasked with managing an entire portfolio of operating leases and calculating valuations in interest, depreciation and liability on a monthly basis for each lease.

This is an area where new advanced technologies, such as machine learning, can play a huge role in automating many of these previously manual processes. One example of an area where machine learning capabilities could be especially useful is for global organisations, where leases must be translated before being inputted into the system. Machine learning can remove this additional step, directly pulling information from leases and contracts regardless of the source language. Moving beyond spreadsheets, these technologies can save financial managers countless hours in generating the financial data needed to keep up with these new regulations, while also reducing reporting errors caused by manual reviews.

Take advantage of IoT and VR technologies to make the most of your space 

Studies have shown that up to 40% of internal space within companies is not being utilised efficiently. Wasted space is particularly prominent in large corporations, where the CFO cannot physically see every site within the company’s real estate portfolio – making it difficult to grasp where inefficiencies lie and costs can be reduced. Internet of Things (IoT) and virtual reality (VR) technologies can mitigate some of these challenges by providing a comprehensive picture of company assets. For example, VR technology can be used to provide online and mobile tours of space to provide greater insight to a certain real estate entity without the need for the executive to be physically present. Additionally, IoT sensors can help monitor energy usage or building occupancy to inform corporate real estate managers and finance executives how property funds are being allocated.

For corporate real estate managers and finance executives – including the CFO –  the challenges of managing corporate leases are rapidly evolving in the face of new regulation and technology advancements. If finance teams are stuck chasing spreadsheets and cannot efficiently allocate and manage real estate assets at the speed of the digital workplace, businesses serve to lose out on critical real estate investments. By taking advantage of the latest lease management technologies, these executives can effectively manage their real estate portfolio, optimise assets on a global scale and ensure compliance with the latest regulatory requirements.

Thack Brown is general manager and global head of line-of-business finance at SAP.