New York City -- Only 7% of executives believe their companies are extremely or very prepared to comply with new lease accounting standards proposed by the Financial Accounting Standards Board (FASB), according to a recent Deloitte survey.
As early as June 2011, the new proposed draft standards distributed in August 2010 may be finalized. To comply, lessees (and possibly lessors) would have to fundamentally change how they account for real estate and equipment leasing transactions, providing more extensive financial statement disclosures than ever before. The new standard would effectively eliminate all operating leases and require them to be capitalized on the company's balance sheet. For lessees, it would also replace rent payment expense reporting with interest and amortization expense reporting.
"These changes will have an immense impact on many companies that lease commercial property," said Josh Leonard, a leader in Deloitte's real estate consulting practice. "Beyond the major changes involved, companies need to start looking at their lease portfolios now for adequate lease information, technology capabilities, and resources to implement and monitor the new standard, expected to be final by mid-year 2011."
Further, to accommodate the new standard, major IT investments would likely be needed. One-quarter of respondents said their companies are likely to have to make a major upgrade to their information technology systems, while 20% said they are likely to acquire a new system. Among companies with 1,000 or more leases, the need for IT investment was even greater -- 39% of these respondents expect the new standards will lead to a major technology system upgrade, while 27% expect to acquire a new system.
“For the real estate industry, the impact of the proposed new lease accounting changes will impact both the balance sheet and tenant strategy and execution. For owners and operators, the big shift will be in what their tenants demand. Shorter term leases may be in high demand along with an increased tenant appetite to forego renting in favor of buying," said Bob O'Brien, vice chairman and real estate services leader for Deloitte LLP.
In addition to changing how they do business, real estate companies are going to have to make changes in how they operate, O’Brien continued.
“The proposed new leasing standards will require a re-examination of capital expenditures on new leases, enhanced lease administration and forecasting systems, and careful consideration of the balance sheet and income statement impacts on existing loan covenants,” he said. “The changes may be sweeping."