companies begin implementing the Financial Accounting
Standard Board’s (FASB) new lease accounting standard
in the near future, commercial real estate managers are left
wondering how their tenants will approach leasing strategies
on a go-forward basis and what the implications will be on
the commercial real estate market as a whole.
While lease accounting experts said real estate managers
shouldn’t expect too much of an impact from the changing
standard—at least initially—they should get up to speed with
the standard and how they will affect their tenants so they
can offer helpful guidance and support that could strengthen
the tenant/real estate manager relationship.
“Being aware of the changing regulations and compliance
standards can help facilitate a value-added relationship with
your clients,” said Sean Torr, a risk and financial advisory
managing director for Deloitte & Touche LLP. “Being savvy
and knowledgeable can be a differentiator.”
FASB LEASE ACCOUNTING STANDARD 101
The evolved lease accounting standard—with effective dates
of 2019 for public companies and 2020 for most other organizations—aims to reduce off-balance sheet accounting by
requiring virtually all leases to be capitalized.
Tenants will now have to present both finance leases (
currently referred to as capital leases) and/or operating leases
with terms of longer than 12 months on their balance sheets.
Currently, operating leases are off-balance sheet, and the associated rent payments are treated as operating expenses on
a tenant’s P&L statement on a straight-line basis.
According to FASB documentation, 1 it maintains that the
changed lease accounting standard will improve lease accounting by:
> More faithfully representing a lessee’s rights and obligations arising from leases
> Reducing opportunities for organizations to structure leasing transactions to achieve a particular outcome on the
> Improving understanding and comparability of lessee’s financial statements
> Providing users of financial statements with additional information about lessors’ leasing activities and lessors’ exposure to credit and asset risk as a result of leasing
> Clarifying the definition of a lease to address practice issues
within current generally accepted accounting principles
(GAAP); and to align the concept of control, as used within
that definition, more closely with control principles used in
revenue recognition and consolidations
However, among commercial real estate professionals, con-
cerns loom that the shift to these new rules could strain U.S.
businesses and the overall commercial real estate industry.
POTENTIAL IMPLICATIONS ON LEASING
More specifically, many commercial real estate professionals are concerned the new lease accounting standard could
alter tenants’ leasing behaviors as they adjust to potentially
recording significant liabilities on their balance sheets.
Still, lease accounting experts caution real estate managers
that such implications are still speculative at this point, and
any implications are still far from taking hold as companies
are more focused on compliance at this time.
HOW THE FASB’S NEW LEASE ACCOUNTING
STANDARD COULD AFFECT BUSINESS PRACTICES
1 Financial Accounting Standards Board, “Leases: How Will the New Guidance Improve Lease Accounting?” www.fasb.org