New Accounting Standards to Impact Commercial Property Leases

new Jason stats graphic - June 2015The method by which commercial property leases are negotiated may be about to change as a result of new financial reporting standards that will compel companies to capitalize their commercial real estate leases, according to a news report from the CoStar Group.

The long-awaited changes, which were recently released by the Financial Accounting Standards Board (FASB) in its Accounting Standards Update, will affect companies and organizations that lease commercial real estate and the commercial real estate brokers and other real estate professionals who represent them, the report said.  The new accounting standard also apply to businesses and other groups that lease large equipment and assets, including planes and industrial equipment, CoStar noted.

The U.S.-based FASB released the standards in the wake of the January release by the International Accounting Standards Board (IASB) of its new standards, according to the report.  The IASB and the FASB have been working on the project together for more than a decade in an effort to unite U.S. and international accounting standards as the result of concerns from investors, analysts and financial regulators that existing standards fail “to clearly and transparently reflect lease obligations,” CoStar reported.

For commercial property leases, the new standards eliminate the guesswork that occurs when determining a company’s lease obligations by requiring transparency on lease assets and liabilities, effectively bringing off-balance sheet lease financing out into the open, CoStar said.

“When the new FASB and IASB leases standards take effect, they’ll provide investors across the globe with more transparent, comparable information about lease obligations held by companies and other organizations,” FASB Chair Russell G. Golden told CoStar in a statement.

While companies may start following the new standards at any time, they will become mandatory for public companies for fiscal years and interim periods beginning after Dec. 15, 2018, and for all other entities for fiscal years beginning after Dec. 15, 2019, and for interim periods within fiscal years beginning after Dec. 15, 2020, according to the news report.

Despite the seemingly long waiting time, companies will need to start preparing for the changes immediately because financial statements will need to be restated under the new standards for several years before the deadline dates, CoStar said.  Corporate 2019 annual reports will require businesses to restate financial statement profits and losses for 2017 and 2018 with the new accounting standards.  That means leases now in effect and those entered into in the future will probably impact financial reporting once the new FASB rules go into effect, according to the report.

Most companies have been aware that the guidelines were going to change, CoStar said, but have done little to prepare as they witnessed multiple false starts and stops throughout the lengthy process.

“It may be on the edge of their radar screen, but today, it moves front and center as companies understand it’s real and going to happen,” one commercial real estate consultant told CoStar.

Under the new standards, companies will be faced with rigorous audits requiring audit trails “to support what it was, what it is, and what it will be going forward,” according to the report.

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