REoptimizer® Blog

Why the FASB Lease Accounting Changes (Almost) Don't Matter

Posted by Don Catalano on Nov 14, 2018 8:33:00 AM

With lease accounting standards in play for the entire second half of the "aughties" decade and for most of the 2010's, many commercial real estate executive have spent the bulk of their careers with no certainty as to how leases will get treated by accountants. With the passage of the new FASB standard in 2016, replacing the 1976-vintage FASB 13 lease accounting standard, the industry has some clarity. However, here's the interesting thing: the changes to the lease accounting standards don't matter much.

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Topics: FASB

FASB 13 -- An Update for 2018 Q4

Posted by Don Catalano on Oct 3, 2018 8:32:00 AM

The changes to the lease accounting standards -- commonly referred to as FASB 13 -- are finally coming into effect for publicly traded companies as of December 15, 2018. Whether your company is privately held or publicly traded, these new standards will change how your leases get reflected on your balance sheet.

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Topics: FASB

FASB 13 And Your Tenancy

Posted by Don Catalano on Aug 7, 2017 8:48:40 AM

In 2006, the Financial Accounting Standards Board realized that the standard for lease accounting in the United States was significantly different from the system used in countries that follow the standards set by the International Accounting Standards Board. FASB started a long process of revising their lease standards to better conform with IASB standards. The new standards were finally developed in 2016, and they don't necessarily clear things up internationally. But they are changing the way the companies have to treat their leases from an accounting perspective.

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Topics: FASB, corporate real estate, commercial real estate

IASB/FASB Lease Accounting Standards - March 2015 Update

Posted by Don Catalano on Mar 23, 2015 9:40:00 AM

For the last few years, the US-based Financial Accounting Standards Board and the International Accounting Standards Board have been reworking the way that tenants account for commercial real estate leases. One proposal was to have the US follow the international lease accounting standards, which would essentially end the concept of an operating lease. That proposal has been modified for the time being in the United States, but the IASB's changes for the rest of the world are going forward.

The IASB's Plans vs. the FASB's Plans

Under the latest draft of the IASB standard, there will only be one type of lease. The "Type A" lease is roughly similar to the current definition of a capital lease. The lease gives the company an asset -- the right-of-use of the leased space -- and makes a liability out of the payment stream. One of the challenges with a Type A lease is that payments aren't fully deductible as expenses. Instead, the interest portion of the expense is deducted while the reduction of the value of the right-of-use asset gets depreciated.

The FASB's new lease accounting standards have a key difference from the IASB's. While both IASB and FASB will treat already on-balance-sheet leases much like they currently do, operating leases are treated differently. Under the standard, American companies will also have to put their leases on-balance sheet. They will, however, be able to treat their payments the same as they currently do -- as a single expense instead of a split up one.

Why Lease Accounting Standards Changes Matter

Right now, tenants that report under the FASB's guidelines, usually known as GAAP, are able to expense their entire operating lease payment. If you pay $20,000 a month for your office space, you write off $20,000 per month. Compare this to what you would do if you owned a building. You would write off the interest portion of your mortgage payment and depreciation on the building. Frequently, those two payments add up to less than you would pay on a lease. While this won't change in the United States, it could change in the rest of the world when you have to follow the stricter IASB standard.

Furthermore, leasing carries another important benefit that goes beyond taxes. When you sign an operating lease under current rules, you don't have an asset or a liability. This means that, compared to a company that spent the same money on owning buildings, you have fewer assets and fewer liabilities, improving your company's operating ratios. Moving forward, you won't have that benefit.

Ultimately, lease accounting standards changes impact how your financial statements look. They typically will not impact how much you actually spend or impact your net cash flow. The benefits (or drawbacks ) of leasing also don't change, other than the loss of the benefit of being off-balance-sheet. This means two things. First, it's important to talk to a qualified accountant to understand how these changes will impact your company. Second, it means that your corporate real estate decisions shouldn't change that much as a result of these new standards. Leasing is still a good idea for many companies.

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Topics: FASB, IASB, lease accounting standards, cre lease accounting, commercial lease accounting, commercial real estate, CRE

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

FASB Lease Accounting and Your Business

Posted by Don Catalano on Aug 7, 2014 8:47:00 AM

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Topics: FASB, Financial Accounting Standards Board, corporate real estate, commercial real estate, tenant tips, CRE