On May 16, 2013 the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Boards (IASB) published a revised exposure draft outlining proposed changes to lease accounting. This will alter current accounting and financial disclosure requirements for both real estate and equipment leases. The revised exposure draft continues to require a lessee to recognize assets and liabilities for the rights and obligations created by a lease, but has modified the method of determining expense recognition and other reporting requirements that were introduced in the original draft.
FASB: Exposure draft of proposed Accounting Standards Update
The criteria for deciding whether to lease or buy will fundamentally change and you'll have to adjust your portfolio strategy accordingly. With the new regulations, it will no longer be possible to manage the balance sheet through operating leases.
How real estate options are evaluated will also need to change. Duration, options, and borrowing rates will all come into play.
Your company will now have to record real estate commitments differently and the frequency in which leases are reviewed will increase. Historically, once an operating lease was executed, the rent was normalized and reported using straight-line accounting.Under the new rules, complex calculations will be required at the time the lease is executed, and the value will change each year. The result is complex accounting entries to both the income statement and balance sheet. Each year, every lease will need to be reviewed, current expectations on the future use of the leased property need to be made, and the accounting entries have to be adjusted to reflect the change in expectations.
The volume of real estate data collection and reporting will increase dramatically. This will include additional details on the future plans for each property as well as expectations on renewals.
Executives and treasury will rely more on CRE teams to provide critical data and analysis for strategic business decisions.
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