Few Tenants Prepared to Comply with Lease Accounting Shift
Just 7 percent of executives believe their companies are very prepared to comply with new lease accounting standards proposed by the Financial Accounting Standards Board (FASB), according to a recent Deloitte LLP survey. The new proposed draft standards distributed in August 2010 may be finalized as early as June 2011. To comply, tenants would have to fundamentally change how they account for real estate and equipment leasing transactions, providing more extensive financial statement disclosures than ever before. These changes will have an immense impact on many companies that lease commercial property, according to Deloitte, an audit, financial advisory, tax and consulting firm.
For the real estate industry, the impact of the proposed new lease accounting changes will affect both the balance sheet and tenant strategy and execution, according to commercial real estate experts. “In addition to changing how they do business, real estate companies are going to have to make changes in how they operate,” noted Deloitte’s vice chairman and real estate services leader Bob O'Brien. The proposed new leasing standards will require a re-examination of capital expenditures on new leases, enhanced lease administration and forecasting systems, and careful consideration of the balance sheet and income statement impacts on existing loan covenants. The changes may be sweeping."
More than 80 percent of the survey’s respondents believe that the lease accounting standards will place a significant burden on financial reporting for tenants as well as property owners, from a financial perspective. Sixty-eight percent of respondents said it would have a material impact on their debt to equity ratio. And, 40 percent of respondents believe the new standards would make it more difficult to obtain financing. However, only 35 percent of respondents are extremely or very confident in the integrity of their company’s lease data--which is needed to comply with the new standard.