REoptimizer® Blog

Understanding the New Lease Accounting Standards

Posted by Don Catalano on Apr 6, 2016 8:47:00 AM

After about a decade of negotiation and work, the Financial Accounting Standards Board has recently issued their new set of lease accounting standards. While their original goal of creating a single global standard never got achieved since the IASB is also releasing a different new set of rules (IFRS 16 Leases), GAAP is changing to more closely track the methodology used in other parts of the world.

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Topics: Lease Accounting

Five Lease Accounting Myths Debunked

Posted by Don Catalano on Mar 9, 2016 8:52:57 AM

After almost a decade-long process, the Financial Accounting Standards Board is finally going to change how leases are treated on the balance sheets of American companies. Since this process has been going on for such a long time, a number of myths have sprouted up about the new lease accounting procedures coming in 2019 or 2020. Here are the five most common ones, why they're myths and what will actually end up happening:

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Topics: Lease Accounting

Lease Accounting Changes -- July 2015 Update

Posted by Don Catalano on Jul 20, 2015 8:55:24 AM

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Topics: Lease Accounting

Lease Accounting Reform Takes Major Step Backward

Posted by Don Catalano on Sep 11, 2014 11:36:00 AM


In 2008, the Financial Accounting Standards Board, which is the body responsible for GAAP -- the generally accepted accounting principles that govern American companies -- embarked on a project to conform its lease accounting standards to those of the International Accounting Standards Board. In August of 2014, this project suffered a major setback.

The United States is one of the only countries in the world to allow companies to choose the tax- and accounting-friendly operating lease treatment. When you treat your real estate leases as operating leases, you don't have to enter an asset on your balance sheet and you don't have to depreciate it. Instead, your only lease accounting task is to write off your payments as expenses as they occur. This lets you keep your organization lean and debt-free while also maximizing your tax write-offs.

Under the IASB standards used in the rest of the world, leases are usually treated as capital items. This means entering the value of the leased property on your balance sheet and accounting for your lease payments as a mixture of interest payments and depreciation. The capital lease treatment is on-balance sheet, complicated and is frequently tax-inefficient.

From 2008 through 2014, the FASB and the IASB worked together to find a way that the American standard could be brought closer to the international standard. They came up with the compromise of splitting leases into two broad camps. Type A leases were to be for equipment, while real estate leases would enjoy a special Type B treatment that would effectively be similar to the current operating lease structure, but not as favorable as the current style of lease accounting.

A transition to this system could have shifted the equation between leasing and buying space for many companies since leasing would end up being slightly less attractive than before. However, when the IASB scrapped the negotiation stating that it would only recognize the more stringent Type A lease rules, it essentially removed the impetus for the entire lease accounting reform process.

As of August 28, no one has announced that the negotiations between the IASB and FASB have been canceled. Nevertheless, with the two bodies now further apart in their views on how lease accounting should be conducted than they were before they started in 2008, it appears like any changes to how leases get treated here in the United States are, at best, years away. With this in mind, changing your corporate real estate strategy to conform to these rules' changing has ceased being necessary.

NOTE: This posting should not be treated as accounting advice. Given the extreme complexity of lease accounting, it is important that you contact a qualified accountant for assistance in understanding the tax and financial implications of any lease or purchase transactions.

 

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Topics: FASB, IASB, cre lease accounting, Lease Accounting, lease commercial real estate, Financial Accounting Standards Board, GAAP, CRE Lease Reform, Corporate Lease Reform, corporate real estate, commercial real estate, tenant tips, corporate real estate strategy

Lease Accounting Standards Update: November 2013

Posted by Michael Sweeney on Nov 26, 2013 10:17:00 AM

For years, the United States' Financial Standards Accounting Board had its own set of rules that differ from the global standards set by the International Standards Accounting Board. However, as globalization continues to define the world's economy, many FASB standards are changing to conform to those set out by the IASB. One significant discrepancy is in how lease accounting works. While the FASB allows companies much more liberal off-balance sheet treatment of their operating leases, that is set to change significantly - PricewaterhouseCoopers has dubbed it "the biggest-ever accounting change."

 

Capital vs. Operating Lease Accounting

Under a capital lease, a tenant keeps the lease on its balance sheet. The value of the interest gets treated as an asset while the obligation for lease payments gets treated as a liability. Every year, the tenant reports an expense for the part of the lease that would correspond to interest while also claiming a depreciation expense for the reduced interest in the property. Under an operating lease, the company gets to keep the lease off the balance sheet and gets to expense the entire lease payment as it is made. A company that has thousands of operating leases spanning decades can actually call itself debt-free under these rules. Having fewer assets can also improve a company's financial ratios.

 

Conforming to IASB Lease Accounting

The IASB's standards for operating leases are much less favorable than the FASB's. Starting with the issue of a paper in March 2009, the FASB and IASB have been working together to create a global standard for lease accounting. Under IASB standards, companies with leases have to capitalize them. Relative to the FASB standard, IASB lease accounting makes balance sheets grow while also growing EBITDA since lease payments get treated as interest and depreciation, both of which are excluded from EBITDA.

 

This change was extremely controversial and, because of the controversy, has led to significant delays in how implementation will happen. Between 2010 and 2013, the FASB and IASB went back and forth with stakeholders trying to figure out a change that would level the playing field for everyone.

 

It appears that a consensus has formed around requiring that leases be capitalized. Under the consensus, "Type A" leases of equipment would be amortized like current capital leases while "Type B" real estate leases would be expensed on a straight-line basis. With a consensus forming, early 2014 will likely bring the drafting of formal standards to be adopted at the end of 2015 or the start of 2016.

 

Lease Accounting and You

The change in lease account will impact the own vs. rent decision for many companies. Companies that lease space because it helps them conserve working capital or it helps them to be more flexible in their operations will still be in good position to lease. However, companies that use leased space primarily as a financing tool to help limit the size of their balance sheets or to reduce their debt load might transition from leasing space to buying it. This could have a significant impact on the retail industry.

 

For most companies, the change in lease accounting makes the own vs. rent decision more complicated. While the real estate equation doesn't change in the near term, the corporate finance one does. The bigger long-term real estate risk could be that an increase in corporate ownership reduces the stock of vacated buildings available for leasing on the re-use market. However, the actual impact of the changes remains to be seen.

 

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Topics: Lease Accounting

FASB/IASB Lease Accounting Update

Posted by Jordan Slater on Mar 25, 2013 2:28:00 PM

Since 2010, the Financial Accounting Standards Board has been working with the International Accounting Standards Board to attempt to bring the United States' Generally Accepted Accounting Principles for lease accounting in line with international norms. This change would require reclassifying  many operating leases as capital leases. It could have wide-ranging effects on the corporate real estate industry.

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Topics: Lease Administration, Lease Accounting