Panel Chairman Says Rulemakers Will Respond to Latest Concerns by CRE Groups and U.S. Companies Over Possible Dislocation of Real Estate Transactions and Capital Markets
Efforts to require companies to capitalize their property leases on their balance sheets have now dragged on for more than four years -- and judging from the hundreds of letters submitted during the public comment period on the latest revision of the proposal, new rules are not about to go into effect any time soon.
Russell Golden, chairman of the U.S.-based Financial Accounting Standards Board (FASB), acknowledged last week that continuing pushback from commercial real estate, large multinational companies, small businesses and other stakeholders will likely require more changes to the most recent exposure draft.
Through the Sept. 13 deadline of the latest public comment period, FASB and its international counterpart, the International Accounting Standards Board (IASB), had received more than 600 letters, almost all critical of the new rules that would require companies to account for leases on their balance sheets.
"It's clear we're going to have to change something, and we should change something," Golden said at a meeting with the Private Company Council (PCC), a group advising FASB on accounting issues.
Some of the most strident criticism of the proposal came from California Congressman Brad Sherman, who serves of the House Financial Services Committee. Sherman warned that the rules would disrupt debt markets, distort the real estate leasing transaction process, and harm small and medium-sized businesses that haven't fully vetted the series of proposals that now date back to September 2009.
"Your outreach efforts have been so inadequate that they remain unaware of the tsunami that is about to hit them," wrote Sherman, a CPA and former chairman of the California State Board of Equalization.
Sherman's letter said the new rules would automatically add $2 trillion to the financial statements of U.S. companies, increasing debt ratios which would compel many firms to cut spending in an effort to deleverage their books
It could also raise the cost of capital and trigger loan covenant violations among the vast majority of businesses that use generally accepted accounting principles (GAAP), which won't yet include the proposed language.
Other critics, such as the Real Estate Roundtable, said the changes would also be a disincentive to tenants signing long-term leases, encouraging companies to shift to shorter-duration leases and avoid renewal options to maintain flexibility and reduce balance-sheet liabilities.
"Both boards have engaged with our associations during the consideration of this project. However, we have substantial concerns regarding the need for the proposed leasing standard, the process used to develop the proposed leasing standard, as well as concerns about the proposal itself," according to a letter submitted by the Roundtable on behalf of nearly two dozen real estate and business groups.
The original lease accounting proposal was released in August 2010 after more than a year of meetings and public input. As written, it would have eliminated off-balance-sheet accounting treatment for operating leases for both property landlords and tenants. Late last year, the boards agreed to exempt some CRE owners from the new requirements, while still requiring lessees to capitalize real estate leases.
"If capitalization moves forward, straight-line expensing should be the norm for both equipment and real estate leases, issues such as debt covenants must be better understood and resolved to avoid driving economic activity," the real estate groups said in the letter submitted Sept. 9. And as we have stated before, FASB and IASB must address the due process and transition concerns that we have continually raised."