New Lease Accounting Standards Change Real Estate Landscape.

In August 2010 the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) released an Exposure Draft outlining sweeping changes to how leases are accounted for and reported. The proposed changes are guaranteed to significantly impact your company’s balance sheet and fundamentally change leasing strategies and practices.

In short, the new guidelines require all operating leases to be capitalized on the balance sheet as "right-to-use assets." For lessees, the net results of this change will be:

• Rent expense will no longer be accounted for on a straight-line basis
• Off-balance-sheet financing via leasing will cease to exist
• Lease expense will be accelerated
• Rent payments will no longer be included in EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization)
• Leases will require periodic reassessments, which affect both the balance sheet and the income statement
• Existing capital leases will need to be recalculated and amortized differently
• Additional disclosures will be required

For lessors, the impacts are:

• Operating leases will be capitalized on the balance sheet (optionally excluding some short-term leases)
• Existing capital leases will need to be recalculated and amortized differently
• Leases will be treated differently under using either a "Performance Obligation Approach" or a "Derecognition Approach"
• Leases will require periodic reassessments, which affect both the balance sheet and the income statement
• Additional disclosures will be required