Skip Ribbon Commands
Skip to main content

News release

Chicago

Ninety-nine Percent of Corporate Real Estate Executives are Unprepared for Proposed FASB/IASB Lease Accounting Changes

Jones Lang LaSalle and CoreNet Global survey finds two-thirds expect balance sheet swell


CHICAGO, AUG. 20, 2009 — Corporate real estate (CRE) executives are substantially unprepared for a proposed major change in national and international accounting treatment of real estate lease obligations, according to a recent survey by Jones Lang LaSalle and CoreNet Global that revealed 99 percent of respondents had not fully evaluated the impact the proposed change would have on their financial statements and operations.  Companies could receive a massive shock to their businesses, as indicated by two-thirds (66 percent) of the respondents who said the changes would have a significant or major impact on the size of their company’s balance sheets.  Eighty-seven percent of respondents agree that they need to learn more about this proposed change soon.
 
“These new leasing proposals will greatly impact every type and size business in the United States. Whether a firm is public or private, this change would impact literally every item a corporation leases not just real estate.  Everything from computers to trucks, an ATM kiosk to a floor in an office tower, would have to be capitalized on a balance sheet,” said Mindy Berman, Managing Director of Jones Lang LaSalle’s Corporate Capital Markets practice.  “Lease accounting has been a stealth issue in light of immediately pressing business matters in the current economic environment and other major accounting changes that were recently made.”
 
Under new standards presented on a preliminary basis by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) slated to be issued in 2011, all leases of real estate and equipment will have to be capitalized on a reporting entity’s balance sheet, whether public or private.
 
The Securities and Exchange Commission estimated in 2005 that U.S. public companies will be forced to capitalize approximately $1.3 trillion in operating leases under the new rules, which would replace FAS 13 and IAS 17 as early as 2012. Industry experts estimate that approximately 70 percent of all operating leases are for real estate, impacting balance sheets by $1 trillion or more.
 
Of the 83 respondents to the Jones Lang LaSalle/CoreNet Global survey, virtually all real estate lease obligations are accounted as operating rather than capital leases.  The survey respondents included corporate real estate executives who work at companies with revenues in excess of $1 billion (73 percent), and 82 percent oversee real estate portfolios in excess of 1 million square feet.
 
According to the survey results, nearly a quarter of respondents (23 percent) said they were unaware of the impending lease accounting changes, while an additional 60 percent had heard of it, but were unfamiliar with the details.
 
Further results indicate:
 
• Only one respondent said his or her company had fully considered the impact of the proposed changes on the earnings, while 58 percent had given the issue no consideration, and 41 percent had looked at it only in a preliminary manner.
 
• Eighty-three percent of respondents indicated the proposed changes would cause a significant (19 percent) or major burden (64 percent) on their company’s administrative requirements.
 
• Ninety percent noted that 95 percent or more of their company’s real estate leases are currently structured as operating leases—responses which cut across all business sectors and everything from small to large lease portfolios.
 
• More than a third of those surveyed (39 percent) agree or strongly agree that the increase in lease-related expenses on their income statements will result in a meaningful detriment to earnings, but even so—respondents are split on the question of whether or not this will change the way analysts and investors consider lease liabilities in valuing companies (29 percent agree it will have an impact, 22 percent disagree).
 
• If this standard takes effect, respondents were nearly evenly split about whether the change will influence their corporation’s lease-versus-own decisions.  Still, well over half of respondents (58 percent) either agree or strongly agree that they may alter the structure of leases should they be capitalized on balance sheets.
 
“We’re definitely seeing a lack of awareness on the part of respondents about these proposed lease accounting changes and impact on their corporation’s financial position,” said Michael Anderson, research and knowledge manager of CoreNet Global.  “We’re pleased that those that will be most affected by these changes are realizing they need to be more informed and prepared for the change.”
 
Will the proposed rule change ultimately result in better financial reporting which is the Boards’ objective?  A slim majority of respondents (53 percent) see the change as more accurately reflecting company assets and liabilities, while nearly a third (32 percent) disagree the changes will create more transparency.  In the end, one thing is certain:  those within the commercial real estate industry are slowly but surely coming to the conclusion that they must begin dealing with this issue in the near future, as the year 2012 is rapidly approaching.
 
About Jones Lang LaSalle
 
Jones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2008 global revenue of $2.7 billion, Jones Lang LaSalle serves clients in 60 countries from 750 locations worldwide, including 180 corporate offices.  The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.4 billion square feet worldwide. LaSalle Investment Management, the company’s investment management business, is one of the world’s largest and most diverse in real estate with more than $46 billion of assets under management. For further information, please visit our Web site, www.joneslanglasalle.com.
 
200 East Randolph Drive Chicago Illinois 60601 │ 22 Hanover Square London W1A 2BN │ 9 Raffles Place #39–00 Republic Plaza Singapore 048619