Implications for Commercial Real Estate – Q4 | 2015
The Federal Accounting Standards Board (FASB) voted on Wednesday November 11, 2015 to approve a set of long-awaited rules requiring companies to account for most leases directly on their balance sheets. Currently, lease obligations are reported within the footnotes of financial statements, as opposed to being included in the actual balance-sheet numbers, which receive the most investor attention.
The new lease accounting standards will become effective and mandatory on January 1, 2019 or, at a company’s election, on January 1, 2018. Public companies and many large private companies will start accounting for leases in the new framework as soon as 2016, to meet other related SEC reporting requirements.
Reasons for Changes
The FASB changes are intended to help investors get a better understanding of the true financial obligations to which companies are committed. The revisions also serve to bring U.S reporting procedures more closely in line with international standards.
Who is Impacted
The FASB revisions will impact all companies that have leases (for real estate or equipment) and that file financial statements. This includes public companies, private entities, and non-profit organizations. The changes will most dramatically increase the obligations that must be reported by retailers, restaurant chains, airlines, and other companies that rely heavily on leasing for their operations.
The changes will not create new financial obligations for companies, but they could impact financial ratios, such as return on assets.
Lease vs. Own Decisions
The criteria for deciding whether to lease or own property may be re-examined by several large corporations. With the new standards, balance sheets will grow for most companies, and the changes will eliminate some of the capital efficiency benefits of leasing.
Of course, decisions to own or lease properties are based on many more variables than accounting rules alone. Economics, portfolio flexibility, and operational requirements should still be the primary drivers. However, the new changes could potentially shift the balance toward ownership, for certain companies that have previously realized financial benefits from leasing.
JLL will continue to produce reports on the FASB standards as more information becomes public. We also have teams available for more detailed analysis of the new accounting standards and their impact on your real estate portfolio.
Items Requiring Balance Sheet Inclusion (in 2019)
- Rent Payments Non-cancellable term
- Contingent Rent Based on Rate or Index
- Renewal Period
- FV of Residual Value Guarantees
- Term Penalties
- Initial Indirect Costs
- Decommissioning Costs
- Lease Incentives
- Performance/ Usage Rent
- Operating Expense
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