The wait is finally over…or is it? Sweeping changes to lease accounting have been finalized. To varying degrees, these changes affect all global companies, across all industries. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), collectively the “Boards,” have now separately issued new standards that will move virtually all leases onto the balance sheet. While the issuance of the new standards seems to symbolize that we have finally crossed the finish line of this epic journey, looking at the situation from an implementation perspective, the starter’s gun has sounded and we are just now leaving the blocks.
CBRE’s Global Task Force on Lease Accounting has developed a new white paper entitled The New Lease Accounting Standards Are Issued: What Real Estate Strategies Should Lessees Consider? (attached) and will continue to provide news and updates on this topic, as well as be a thought leader for the industry.
The new standards require lessees to essentially capitalize all leases, including real estate, equipment, automobiles, etc. Companies that report under International Financial Reporting Standards (IFRS) will treat all leases as Finance Leases with a front-end-loaded expense pattern, while those following U.S. Generally Accepted Accounting Principles (GAAP) will determine if the transaction more closely resembles a rental or a financing and classify the lease as either an Operating Lease or a Finance Lease, respectively. The effective date for the FASB standard (Accounting Standards Codification (ASC) 842) is 2019 for public companies and 2020 for private companies, while the IASB has an effective date of 2019 for all companies that will follow IFRS 16. Both Boards allow for early adoption of the new standards.
At first glance, the thought of capitalizing all leases—whether for a company’s headquarters or for a copy machine on the fifth floor—seems like it will necessitate a change in corporate strategy. However, once the initial shock of capitalization wears off, CBRE does not believe it will have a significant impact on real estate transactions. At the margins, it is possible that deals may be structured differently, especially in the United Kingdom where it is not uncommon to have unusually long lease terms ranging from 25 to 100 years. In this case, a greater number of companies may consider reducing the length of their leases or the types of renewal clauses within. However, in general, the vast majority of real estate leasing should emerge unscathed.
The changes to lease accounting may alter the “lease versus own” strategy for a company. To read more click here: New Lease Accounting Standards Feb 2016