NEW YORK CITY-While the fate of lease accounting standards has not yet been determined, the benefits and drawbacks of the revised proposal set forth by the Financial Accounting Standards Board and International Accounting Standards Board were debated by panelists at ALM Real Estate Media Group’s 2012 RealShare Net Lease conference on Tuesday afternoon.
After both FASB and IASB were unable to agree on a proposed amortization schedule during their Feb 28-29th meeting, the standards board announced several alternatives to the original plan, which initially involved the elimination of the differentiation of operating and capital leases on a company’s balance sheet. As it currently standards, the boards are considering an underlying asset approach, which, according to FASB, is considering the consequences that the changes would bring both lessors and lessees.
“This is the preferred method of the IASB, and it’s considered by some as a purer method,” said Serena Wolfe, a partner at Ernst & Young’s New York office. “Nobody is sure where it is going to go. It’s going to take a while for the boards to flesh these ideas out more to provide a little bit more color as to how to actually come up with these concepts, but I think it’s an indication that the boards are listening to you, and they are working to create a solution or create a way to mediate a decision.”
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Under one proposed approach, the lessee would amortize the right-of-use asset based on the estimated consumption of the underlying leased asset over the lease term, according to FASB. As a result, the higher the consumption rate, the more the income statement effects would resemble those that would arise from purchasing the underlying asset and financing it separately.
A second approach, says FASB, would outline all the risks, rewards and future economic benefits of the underlying asset. David Kessler, managing principal at Bethesda, MD-based Reznick Group, said that actions could result in shorter-term leases, due to the lower risk involved. “There will be an aversion to have large liabilities on a balance sheet,” he said.
In response to the potential impact the regulations could have on the commercial real estate industry as a whole, Kessler said the general school of thought is that the markets will adjust. “The other side of that argument says governance has increased, and now we have a different make-up on our balance sheet, so that has to be dealt with one way or another,” he added, noting that compliance could emerge as a new issue for companies to tackle.
In a recent survey of commercial real estate executives conducted by Deloitte, respondents expected impacts of roughly two-thirds of on debt and equity, and half of a return on assets, according to Josh Leonard, a partner at Deloitte Financial Advisory Services LLP. He noted that almost half—42%--indicated that more are leaning toward short-term leases, and 28% of lessees are deciding to purchase rather than lease if the changes go into effect.
But overall, Leonard said the regulations would signal a convergence within individual companies, noting that CFOs will coordinate more with real estate owners and managers as a result. “They will have a closer relationship than they have in the past,” he said. “While this will be different than the way it has been done in the past, I do think there will be better reporting and better information and better positioning by the companies once they make this transition. It will lead to better information and more accountability.”
(For more coverage of the event throughout the day, follow us at @GlobeStLIVE on Twitter, and watch for Real Estate Forum's April issue for a comprehensive look at the Net Lease Market.)
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