How can corporate real estate executives treat the game-changing legislation as a chance to make things more flexible?
When the 2018-2019 tax year ended in April, corporate real estate executives (CREs) all over the world found themselves in an unprecedented situation.
For the first time, a significant proportion of office lease obligations appeared on their companies’ annual balance sheet as liabilities. And, according to Accountancy Age, for FTSE 350 companies, these leases amassed a whopping £180 billion.
On January 1st, 2019, IFRS was introduced – an international accounting standard that means many lease contracts that meet certain criteria now have to be reported as liabilities. It’s the biggest accounting shake-up for real estate in decades. And these additions to companies’ bottom lines will no doubt have also raised concerns. How will this affect businesses’ credit ratings? Will these new liabilities affect how financially fit a company appears from the outside? What will potential investors think?
Companies will be turning to CREs to lead the way on mitigating the effects of IFRS 16. Fortunately, there is a potential solution for them to proactively reduce a company’s real estate footprint – one that, if suitable, would also lower overhead costs, reduce inefficient use of office space and provide an enhanced workplace environment simultaneously.
Seven months on from the introduction of IFRS 16, for large corporations everywhere - the regulation may be the final push to make the move to flexible office space. This is because one of the exemptions to the new legislation is that of short-term office leases – those lasting 12 months or less. It’s not a silver bullet solution, and there are other conditions that need to apply for exemption. But it may be worth looking into. And if a company is open to the benefits of a short-term office lease, their bottom line may thank them for it.
“The implication of IFRS 16 is global, for all companies irrespective of where their shares are being listed – everyone is in the same boat,” says Vincent Lottefier, strategic advisor to IWG and president of Co-Working Future.
“It’s safe to say that, while corporate real estate executives round the world supporting large companies have had a fair amount of pressure from their business to have their talent pool sitting in flexible solutions more often than not, they’ve just been given another reason to really look seriously at flexible office solutions.”
In March, Mark Dixon, CEO of IWG - the world’s leading provider of flexible office space – said that the company was: “pretty much a third up on corporate business from the third quarter of last year. That’s not all coming from IFRS 16, but a lot of it is.”
At IWG, we’ve reported before about the shift that’s taking place for CREs today. Rather than being perceived as a risky choice compared to conventional office set-ups, flexspace is increasingly being viewed as a safer choice for corporations.
Aside from IFRS 16, moving to a more flexible corporate real estate solution is a sign of the times – a reflection of how workspace is becoming about so much more than about renting four walls, but about talent retention and productivity too. It’s now more a service and a commodity. And, if short-term leases are an option for your company, why not explore the opportunity they could offer to balance the books in the wake of IFRS 16?
“Signing a service contract (SaaS) reduces the impact on your balance sheet for that given year,” says Lottefier “It’s a significant impact, and therefore, a significant advantage of not signing a lease agreement.”
He adds: “The pressure to get into this sort of space has come more from the core business – such as sales and HR – and these departments are putting more pressure on CREs to drive more flexibility and find more exciting space for their talent pool.”
Find out more about IFRS 16, and explore how your company could make the move to flexible workspace