Leased corporate real estate portfolios to be overhauled by new accounting standards

                                                                                                                                                Leased corporate real estate is about to undergo a massive change that will fundamentally shift how real estate is viewed by senior management and challenge CRE professionals to support their organization like never before.

Did that get your attention? If not, maybe this will…

In 2012, the International Accounting Standards and the Financial Accounting Boards will, “utilize a completely new model for lease accounting under which lessee’s rights and obligations under all leases, existing and new, would be capitalized on the balance sheet” according to a recently published white paper entitled, “The overhaul of lease accounting: Catalyst for change in corporate real estate” authored by PricewaterhouseCoopers’ Real Estate Advisory Services National Practice Leader, Xavier Menendez.

I know what you’re thinking, yawn, yawn, yawn, “I’m a CRE professional and this is an accounting issue.” Wrong! I’m hoping this post will get you to sit up and take notice, research the new standard and proactively approach your organization’s CFO/Controller to discuss how your organization might prepare for these changes.

The PricewaterhouseCoopers document highlights that the new lease accounting standard will:

  • Eliminate off-balance sheet accounting – assets currently leased under operating leases will be brought onto the balance sheet
  • Replace straight-line rent expense with interest expense
  • Recognize and carry leases at an amortized cost based on the present value of payment to be made over the term of the lease
  • Include optional renewal periods that are more likely than not expected to be exercised and include contingent amounts for percentage rent or CPI increases
  • Impact lease renewal and contingent rents by being continually reassessed, and the related estimates trued up as facts and circumstances change
  • Require significant systems and process changes at adoption date and maintenance on an ongoing basis
  • Not permit pre-existing leases to be grandfathered

The implications will place real estate front and center in the CFO/Controller’s cross hair when the cost and value of these leases are realized. It is likely that many functions now being managed in the RE/FM Department will be assumed by the Finance Department. And, rightfully so given the amount of risk exposure a large leased portfolio has to an organization. The new standard will have a greater impact on retailers and banks that rely heavily on leased facilities to support their operations but it will affect all leased facilities.

Don’t wait to get the memo. Start assembling financial information and lease abstracts, get your information systems in order and document your controls, procedures & processes. Reexamine everything and anticipate how you might alter your corporate real estate strategy to address the tax considerations, operational, economic, regulatory, intercompany, governance, budgetary and financing issues.

What have you heard about these evolving standards? How do you think the new lease accounting standards will impact your corporate real estate strategy?

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3 Responses to Leased corporate real estate portfolios to be overhauled by new accounting standards

  1. bernie says:

    Larry
    I’m glad you highlighted this. The FASB has a target for a final requirement to be published in 2nd half of 2011 with expected requirement to comply from Jan 1, 2012. For most companies a system is the only way to demonstrate compliance. This effectively leaves 18 months for folks to get a system in place and get the accounting sorted out. Considering requirements gathering, procurement, implementation and accounting issues time will start to become short for most companies real soon. If anyone wants to progress this they need to find a good partner to help them get on with it soon.

  2. Bob Cook says:

    Yes, the industry is going to be hardpressed to comply with this new standard. Even if every corporate real estate exec put this at the top of his agenda now, it would be difficult to develop all the new processes that will be needed. Unfortunately, many are still in denial that this is more than just an “accounting issue” that doesn’t involve them. I see this scenario: as we get closer to the required compliance, CRE execs finally understand what is needed and panic will set in, consultant fees by then will be sky-high because the industry just doesn’t have enough talent do everything that needs to be done, and with budget and time constraints, some companies just won’t be able to comply by the deadline. Heads will roll. Not a pretty scene.

  3. I wanted to thank you for this great read surely enjoying every truly small bit of it and I have bookmarked to examine out new stuff you post.

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