Posts Tagged ‘FASB’
|5 things every corporation should do to prepare for the upcoming lease accounting changes
Wednesday, January 25th, 2012
By Brant Bryan, Principal
In the near future the FASB and the IASB will jointly issue new guidelines for lease accounting. These new standards are substantially different from the current standards and will affect every corporation that issues public financial statements.
In the new standards all leases will be reflected as both an asset and a liability, thus “inflating” the size of corporate balance sheets. During the lease term, the asset and the liability will be expensed, but in different patterns than under current standards.
The new standards will likely become effective in about 2 years. What should corporations be doing now to prepare for this sea-change of lease accounting?
1) Update your lease database. The new accounting standards will require corporations to assign a value to every lease transaction. The value will be based on more information than most corporations now include in their lease database.
2) When entering into new leases evaluate them using both the current lease accounting implications and the new standards. All leases will be included in the new standards. There will be no “grandfathering”. Therefore, you need to know what impact each lease will have on your financial statements in both 2012 and in future years.
3) Examine the effect of lease length on your financial statements. Longer term leases will normally cause a greater increase in the size of the lease asset and liability. How will increased balance sheet size impact your performance ratios and metrics? Begin to establish a philosophy of what your company wants.
4) Talk with bankers, real estate consultants and rating agencies about how the changes will impact your credit capacity, rating and borrowing cost. Leased assets will be a separate category on the balance sheet and effectively is a source of financing for lessees. Most companies believe it should be “business as usual”, but understand what it means for you and your borrowing costs.
5) Look again at the options in your leases and how you structure those options. More than ever, lease options will be important. Some rent streams may shift onto or off of your balance sheet, depending on your objectives and the facts and circumstances. Also, the new standards may cause you to prefer your options to be structured differently than you have done so previously.
Tags: corporate real estate, FASB, IASB, lease accounting, lease structuring
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Accounting Boards Come Full Circle
Wednesday, June 1st, 2011
By Brant Bryan, Principal
If you are into accounting, this is high drama.
After lengthy debate, the US and International Accounting Boards (the FASB and IASB) tentatively decided in their May meeting to have all leases accounted for as a financing lease. This reversed their decision earlier this Spring which would have provided an additional classification allowing some leases to be accounted for on a straight line basis. The Board decided that it is less complex, overall, for all leases to be accounted for through a single approach.
What does this mean for tenants? ON A TENTATIVE BASIS, here are some highlights:
-All lessees will reflect a front-loaded pattern of expenses. Expense will be a combination of interest expense and an amortization of the recorded asset. Higher interest expense will be charged during the early periods of a lease.
-All leases will be capitalized and added to the balance sheet as an asset and a liability.
-All measurements will be made as of the lease commencement date.
-At the beginning of a lease, tenants will determine if they have significant economic incentive to exercise options for renewal, expansion, purchase, etc. If there is such incentive, the options shall be included in the measurement of lease asset and liability.
-Reassessment of lease options will only be required when there is a significant change in economic incentive. Market based factors will not be considered in reassessments.
-The discount rate used in determined lease liability or asset value will only be revised when there is a reassessment caused by a change in economic incentive to exercise options.
-The Boards did not reach a consensus on whether there will be one or two models for lessor accounting, and thus that is still an open item.
-The Boards expect to complete the lease project by the end of 2011. Implementation will likely begin in 2013 or 2014.
As the Boards reach more decisions and release more information, we will let you know what is being said and what this might mean for tenants.
Tags: corporate real estate, FASB, lease, tenant
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Changes in Lease Accounting Simplified
Wednesday, March 16th, 2011
By Brant Bryan, Principal
The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) tentatively agreed to revise some of the proposed lease accounting standards. Nearly 800 letters and comments had been sent to the Boards in response to the proposed changes, and as a result, the Boards are simplifying portions of the new lease standards. However, the Boards remain firmly committed to requiring that all leases be recognized on the balance sheet.
What Has Changed?
The tentative changes from the initial Exposure Draft that will have the biggest impact to corporate tenants are:
-Defining Lease Term as the base term plus only option periods for which there is significant economic incentive to extend.
-Leases with variable lease payments (such as percentage or contingent rent) will have a threshold for inclusion in lessee’s lease liability and asset.
-Creating two classifications of leases: (1) Finance Leases and (2) Other-Than-Finance Leases.
-Affirming the direction of the Exposure Draft to require all leases to be reflected on the balance sheet as both an asset and a liability.
What Are the Specifics of the Changes?
In a significant change from the Exposure Draft, the Boards decided that all lease terms will be the contractual minimum period plus any optional renewal periods for which an exercise of the renewal option is reasonably certain. Reasonable certainty will be based solely on economic factors within the lease, such as bargain pricing on renewals. The Board plans to provide specific criteria to be used in this assessment. These tests likely will be very similar to the current GAAP standard concerning renewals. The ED had proposed including renewal terms if they were more-likely-than-not to occur based on a wide variety of factors, including lessee past practice, market conditions, and lessee intent.
One change that will greatly simplify life for corporate lessees is that there will be fewer reassessments of renewal options during the lease term than the Exposure Draft had proposed. Reassessments will only need to occur when economic factors affecting the decision to extend or terminate a lease change significantly. Lessees will not need to search for reassessment events.
The Boards also decided that variable lease payments tied to an index or rate would be included in lease calculations using the current rate, or spot market, for that index or rate, rather than a forward projection. There will also be thresholds for including contingent rents in leases (such as percentage of sales). Such contingent payments will only be included when they are virtually certain. If variable payments are, in substance, minimum lease payments, they shall be included based on such minimum.
There were also discussions regarding several other issues, including: which agreements shall be defined as a Lease, Residual Value Guarantees, and Lessor Accounting.
Two Types of Leases:
In another significant change from the Exposure Draft, the Boards tentatively decided there will be two classifications for leases, and each type will have a different pattern of recognition in an income statement. All leases will either be a (1) Finance lease or (2) Other-Than-Finance Lease. The Boards will develop criteria for distinguishing between these two types of leases.
A finance lease will be viewed as a financing transaction. The pattern of income for a finance lease will be consistent with the methodology presented in the Exposure Draft as it will be treated as a financing, with more expense early in the lease term. If the lease is similar to a rental transaction and financing is not considered to be a significant part of the transaction, the lease will be treated as an Other-Than-Finance Lease. The pattern of income for an Other-Than-Finance Lease will be consistent with current US GAAP (straight lined or leveled).
What Is Next?
Deliberations will continue, and other changes may be forthcoming before a final lease accounting standard is issued. June 30, 2011 is still the target date for finalizing the new standards. The exact schedule for formal adoption of the new standards has not been set; however, most observers expect larger corporations to begin reporting under the new standards with their 2012 fiscal year-end.
Tags: corporate real estate, Exposure Draft, FASB, IASB, lease, lease accounting
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FASB Fears = Opportunity to Shine
Wednesday, November 24th, 2010
By Jeff Tosello
With all of the hype surrounding the now not-so-newly proposed changes to the way the Financial Accounting Standards Board (FASB) and International Financial Reporting Standards (IFRS) will require companies to report lease costs, it’s going to take expensive, highly developed software and a team of Harvard mathematicians working for weeks on a complicated set of algorithms to figure it all out, right? Wrong!
Here’s the good news: much of the information that will be needed to perform the compliance calculations are already essential components of good solid lease administration now. The trouble is that many companies cannot or do not properly execute lease administration, so they don’t have this crucial information. Companies often fail in one or more of the following areas:
- No firm grasp on their complete lease portfolio (international or domestic)
- No confidence that all of their documents are signed, accessible, and up to date
- No reliable extraction of lease information (abstracts)
- No up-to-date database of lease information (working from an outdated
spreadsheet)
- No idea what market rent is or will be when renewal needs to be considered
- No idea about business units’ plans relative to available options
Getting these items under control now is critical in order to anticipate the proper numbers on the company’s balance sheet later. Having a documented business process for knowing where these numbers come from, what considerations are given for changing them, and how to track changes from reporting period to reporting period is the key. These are services that can be immediately available through Lease Administration professionals.
If your company is concerned about FASB/IFRS changes in lease accounting but aren’t sure what to do to even start considering how you’ll comply, consider the list above. If you feel confident in these areas and want some help considering the impact to their financial statements, schedule a consultation with Capital Markets experts. If you do not feel confident in these areas, consult with Lease Administration professionals to discuss getting these things in place today.
Tags: corporate real estate, FASB, lease accounting, lease portfolio
Posted in Lease Administration | 1 Comment »
Future Real Estate Transactions May Impact Lease Economics
Wednesday, September 15th, 2010
By Jim Leslie
As the Financial Accounting Standards Board (FASB) changes in lease accounting rules continues to gain momentum for adoption within the next few years, corporations should now begin setting strategy for future occupancy expenses. These new rules requiring all lease obligations to be capitalized and shown on the balance sheet of the tenant (eliminating FAS 13 calculations for determining operating lease treatment) may change the attitude companies have towards owning versus leasing. The critical component will become the underlying cost of capital for the landlord/owner as compared to the cost of capital for the tenant. This may require developers and landlords to become more sophisticated in the underlying financing to provide capital to their buildings. While this change may seem overwhelming to many, it is similar to the international accounting rules that have been in effect for years. American CFOs may want to look to their colleagues in those markets to get some baseline knowledge on how deals are structured and gain some initial thoughts on efficient structures for their own balance sheets and operations.
In addition, the proposed accounting rules will have an impact on loan covenants currently in place, which will need to be renegotiated or waived. Traditional calculations for valuations of companies will change as the reporting of occupancy costs may cause a different result for EBITDA or Free Cash Flow. Many of these defined terms in loan agreements will trigger a default under the new rules.
While some corporate real estate professionals have begun thinking about the impact this will have on their future transactions, it does not appear many landlords have given it much attention. Change brings a lot of confusion and uncertainty, but it will also create some new opportunities that were not available under the old accounting rules. Now is the time to be forward thinking and lead your company into the new era. The professionals that can thoughtfully consider the ramifications of the new accounting rules and the impact it will have on the financing market will certainly be highly regarded by their peers and supervisors.
Have you been thinking about the proposed FASB changes and how they will impact your business?
Tags: corporate real estate, EBITDA, FASB, Free Cash Flow, lease accounting
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