Though New Rules Don't Go Into Effect Until 2019, Experts Say Long-Term Leases and Company Financial Reporting Could Potentially Be Affected Much Sooner
The Financial Accounting Standards Board (FASB) this morning released long-awaited changes to financial reporting standards that will require companies to capitalize their real estate and equipment leases -- a dramatic accounting shift that could potentially affect how commercial property leases are negotiated going forward.
The changes, contained in a FASB Accounting Standards Update, affect all companies and other organizations that lease commercial property and the brokerage and other commercial real estate services professionals who represent them. The standard also covers any entity that leases large equipment and assets such as airplanes and manufacturing equipment.
The FASB signaled that it would release the standards this month after its London-based international counterpart in the project, the International Accounting Standards Board (IASB), published its new rules in January. The two groups have worked jointly since 2006 to try to converge U.S. and international accounting standards in response to concerns from investors, analysts and financial regulators that current standards fails to clearly and transparently reflect lease obligations.
"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 said in a statement.
The updated standards take effect for public companies for fiscal years and interim periods beginning after Dec. 15, 2018. For all other organizations, they take effect for fiscal years beginning after Dec. 15, 2019, and for interim periods within fiscal years beginning after Dec. 15, 2020. Organizations are permitted to voluntarily begin adhering to the new standards earlier.
That might seem like a long time, however, annual reports published for 2019 will require the company to restate profits and losses on financial statements filled for 2017 and 2018 using the new accounting standards, said Jeff Beatty, senior managing director for CBRE’s Financial Consulting Group. Thus, leases entered into going forward or in effective today will most likely have an impact on financial reporting once the standard goes into effect, Beatty added.
"It will present itself more quickly than it seems. Leases aren’t grandfathered into the standard, so any effective leases will have to be capitalized," Beatty said.
Companies, lulled by the many false starts and stops of the accounting rule change process, will need to begin preparing immediately, he said.
"Most companies are aware of the changes, but I don’t think companies for the most part have been preparing," Beatty said. "The best example of their view is the boy who cried too many times, over five to 10 years.
"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," Beatty said.
IASB and FASB officials said the new requirements will end the guesswork involved when calculating a company’s often-substantial lease obligations by bringing much-needed transparency on lease assets and liabilities, bringing off-balance sheet lease financing out the shadows.
The new guidance "ends what the U.S. Securities and Exchange Commission and other stakeholders have identified as one of the largest forms of off-balance-sheet accounting, while requiring more disclosures related to leasing transactions," Golden noted.
"We’ve been speaking with many organizations that have been waiting for the standard to be released before they were going going to do anything. That time is here," said Jim Dooley, senior vice president of sales and marketing for CoStar Real Estate Manager, which provides software and services for corporate and retail real estate management.
"The problem is that the flood gates have opened, but the limited resources to help address the issue remain the same, and the deadline is defined," Dooley said. "But don’t be fooled by the deadline, since the new standard will require restatement of financial statements for several prior years."
Further, organizations will be undergoing scrupulous audits involving the accounting change, requiring audit trails "to support what it was, what it is, and what it will be going forward," he said.
Dooley’s advice is simple: get started now.
"There’s a lot to this standard with significant impact to the financial statements that the top executives of each organization will have to sign off on," he said. "Waiting any longer is just not a viable option anymore. There is pent up demand and we are well positioned to meet it."