Lease Accounting Changes Impact Real Estate Planning
April 03, 2014
In 2013, the US and the International Accounting Boards (FASB and IASB) issued proposed changes to lease accounting that will affect both tenants and property owners. For tenants, the new rules are intended to increase transparency as to financial commitments and cash flow. Required changes for property owners will create increased transparency about the nature of financing agreements and residual asset value.
The Boards undertook the revision in response to a desire by stakeholders, including investors and financial institutions, for more uniformity in how assets and liabilities are presented on the balance sheet.
The most noteworthy change for tenants is the new requirement that leases be recorded on the balance sheet. The lease will be recorded as a new asset and a new liability. The “asset” is the “right of use” conferred by the lease. The financial obligation under the terms of the lease will be recorded as a liability. Because most commercial leases are five years or more in length, it’s prudent to evaluate how the upcoming changes will impact any leases that will be renewed before the changes take effect.
These lease accounting rules changes are scheduled to take effect for the 2017 tax year. However, as I work with Bayshore clients to review leases for renewal, I’m considering what’s on the horizon and starting to plan accordingly. Most important is to make sure your systems and technology are capturing the data that will be required. More data will need to be gathered and reported as a result of the new rules. The changes in accounting requirements will impact finance, information technology and possible human resources.
Be sure to keep the upcoming changes in mind as you formulate corporate strategy in regards to financing, operating requirements and real estate decision making. Right now is a good time to examine your corporate real estate strategy and consider if using alternative lease structures or possibly purchasing your facilities makes sense.
If you have questions or concerns about how the upcoming changes will affect your current renewals, please give us a call.
< Return to News