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Lease Accounting Reform Takes Major Step Backward

Posted by Don Catalano on Sep 11, 2014

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