Despite almost all respondents indicating that they have not fully evaluated the impact of the proposed changes, the survey also showed that two-thirds said the changes would have a significant or major impact on their balance sheets. The vast majority of respondents--87%--agreed that they need to learn more about the proposed new accounting rules soon. Twenty-three percent indicated that they were not even aware of the impending changes.
As currently proposed the changes--the result of a joint project between the Financial Accounting Standards Board in the US and the International Accounting Standards Board--would require public and private companies alike to capitalize on their balance sheets all leases of real estate and equipment. According to Jones Lang LaSalle, in 2005 the Securities and Exchange Commission estimated that the new rules would translate to companies capitalizing about $1.3 trillion of operating leases. "Industry experts estimate that approximately 70% of all operating leases are for real estate, impacting balance sheets by $1 trillion or more," JLL says.
"These new leasing proposals will greatly impact every size business in the United States," Mindy Berman, Boston-based managing director of Jones Lang LaSalle's corporate capital markets practice, says in an announcement. "Whether a firm is public or private, this change impacts literally every item a corporate leases--not just real estate. Everything from computers to trucks, an ATM kiosk to a floor in an office tower, will have to be capitalized on a balance sheet. We're pleased that those that will be most affected by these changes are realizing they need to be more informed."
While corporate real estate executives are not typically on the front lines of accounting issues, they need to be aware of and actively considering these proposed changes, Berman tells GlobeSt.com. They "should be aware and integrating into their decision making process" the prospective impact these changes could have on real estate and other leasing choices.
Retailers, commercial banks (because of their extensive branch operations) and airlines (for both planes and airport facilities) are the three industries with the greatest lease exposure, says Berman. Should they indeed be adopted, the accounting rule changes are most likely to impact the attributes and terms of leases, particularly in terms of pushing for shorter lease terms, Berman adds, and thus influence the negotiation of structure and terms of all leasing transactions, including real estate net leases and sale-leasebacks.
But she does not expect the changes to adversely impact companies' decision to pursue sale-leasebacks, which among other historical benefits have moved real estate off balance sheet for the corporate occupant. "Most sale-leasebacks today are driven by the desire to raise capital, monetize assets, or as part of a corporate real estate strategy," Berman notes, adding that she expects the lease accounting changes are "not going to change behavior around sale-leasebacks to a large degree."
As previously reported by GlobeSt.com, the FASB and IASB released a discussion paper on the lease accounting project in March; a public comment period ended last month. Nearly 300 comments were submitted, with just a few coming from the commercial real estate industry, including one from Jones Lang LaSalle. They can be read on the FASB's website. The boards expect to publish an exposure draft of the proposed rules in 2010.
"We're definitely seeing a lack of awareness on the part of respondents about these proposed lease accounting changes and impact on their corporation's financial position," CoreNet Global research and knowledge manager Michael Anderson says in an announcement. "We believe lease accounting has been a stealth issue in light of immediately pressing business matters in the current economic environment and certain major accounting changes that were recently made."
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