FASB Lease Accounting Proposals
The Issue · Position · Status · Talking Points · Resources
The Issue
On August 17, 2010, the Financial Accounting Standards Board (FASB), an independent body that establishes accounting standards for the private sector that are recognized by the Securities and Exchange Commission as authoritative, issued an Exposure Draft detailing proposed changes to standards governing how landlords and tenants account for their leases. The proposed changes are intended to increase transparency for investors by, among other things, requiring that the full long-term payments associated with the leases be shown on the balance sheet of the tenant as liabilities. Renewal options and contingent rents would be included when calculating liability under lease agreements. Operating leases would be capitalized and represented as current liabilities.
The business community and the real estate industry in particular are extremely concerned that the proposed changes would have a major negative impact upon businesses without achieving the goals of increased transparency for the investor community. The proposed standards, if implemented, would dramatically increase the level of debt that appears on some corporate balance sheets, without there being any real change in the economic condition of the tenant. The increased level of debt that would result on the balance sheet from longer-term leases would create disincentives to tenants to enter into such leases, making financing of projects more difficult for the owner/developer of commercial real estate properties.
Thirty-five trade groups, including NAIOP, the U.S. Chamber of Commerce, and associations representing insurance and financial services, among others, signed a coalition letter setting forth specific concerns and urging a delay in implementation of final standards. NAIOP filed its own Comment Letter to FASB on December 10, 2010. In February 2012, NAIOP, its real estate allies, and the U.S. Chamber of Commerce released a study titled The Economic Impact of the current IASB and FASB Exposure Draft on Leases, conducted by Chang & Adams which found that the proposed lease accounting changes would have a pronounced impact upon the real estate sector, costing at least 190,000 jobs or more, depending on measures that companies would be forced to take to reduce the impact upon their balance sheets.
Position
NAIOP opposes FASB's changes to lease accounting standards as currently proposed. The proposed standards would have a negative effect on the duration of lease terms, lessen the availability of capital for real estate development, increase accounting complexity, and add substantial administrative costs for compliance with the new standards. FASB should at the very least undertake a more comprehensive review of the economic impact that such a change would have on the commercial real estate industry before issuing a final lease accounting rule.
Status
FASB originally intended to finalize the new leasing standards by June 2011, but later announced a delay until December 2011. FASB has now said that it intends to issue the final rule in the first half of 2012.
Talking Points
- FASB's proposed lease accounting standard would result in lessees incentivized to choose shorter lease terms, with no renewal options or contingent rent provisions. To do otherwise would increase their front-end costs and reduce their earnings, with a negative impact on their stock value.
- Lessees would have to document and disclose their future renewal intentions and what rents they expect to pay, affecting their negotiating posture with their landlords.
- Property developers work hard to attract creditworthy tenants and sign them to long-term leases in order to obtain better financing and valuation terms. Because the standards encourage shorter-term leases, they could lead to a reduction in the availability of capital for both lessees and lessors.
- Investors (such as pension funds, insurance companies, and others) choose real estate in order to match assets to their long-term obligations, and shortened lease terms will undermine the attractiveness of real estate assets for these purposes.
- The proposed standards increase accounting complexity and subjectivity. Lessees will need to estimate the likelihood of lease renewals and the exercise of options that may take years if not decades into the future under existing lease arrangements. They will also have to estimate payments and contingent rents that are not true current liabilities.
- Administrative and operating cost increases will be substantial. Lessees and lessors of investment real estate with a multitude of lease transactions will face added costs in terms of changes or additions to their information technology systems, increased complexity in their financial accounting and reporting processes and their internal controls.
Resources
Contact:
Aquiles F. Suarez
Vice President for Government Affairs
(703) 904-7100 ext. 115
|