FASB and IASB's New Lease Rules: "If it's going to be on my books anyway, shouldn't I own it?"

Thanks, FASB, you totally just fucked already fragile commercial real estate (to hear CRE tell it). If you look at new FASB/IASB lease rules, it makes sense to pretty much eliminate the operating lease if transparency on the face of financial statements is your goal but then what the hell makes a lease a lease? And what's to encourage businesses to go for the lease option if they are going to have to show the lease the same way they would any other liability that isn't yet paid for?

Via CoStar Group:
Commercial real estate industry analysts say the proposed rules would have a profound and mostly negative impact on commercial tenants and landlords, with a steep learning curve amid the challenges for their brokers and other service providers. Many believe they will dramatically increase the complexity of lease arrangements and create a powerful incentive for tenants to sign shorter-term leases, while making it more difficult for owners to achieve the long-term leases favored or required by lenders and investors. It would also lead to more companies deciding to own their buildings instead of leasing them.

Mindy Berman, managing director of capital markets for Jones Lang LaSalle, tells CoStar that adoption of the new rules, as proposed, "would result in a huge change in leasing behavior."

"The leasing premium will be really diminished, especially for single-tenant buildings," Berman said. "Given the enormous administrative burden and the complexity of financial reporting that will result, single tenants will be asking the question, 'if it's going to be on my books anyway, shouldn't I own it?'"
So? Is a lease a liability?

Whatever. As previously stated, it's obvious that FASB and the IASB really needed something to keep their hands busy.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


Anonymous said...

A few random thoughts:

1. To answer your last question, yes, a lease is a liability; therefore it should be on the balance sheet.

2. "Capital" leases are already on the balance sheet, so what's the big deal?

3. Leases are often "structured" as an operating lease to keep them off the balance sheet.

4. Does anyone really think that accounting should drive lease vs. buy decisions?

5. Wouldn't you feel safer if an airline had some assets on their balance sheet?

Yes but then what makes it a lease? There are plenty of things that don't end up on the balance sheet that probably should, why do we care so much about leases?

And no, I doubt that anyone thinks accounting should drive lease vs. buy decisions but that is mostly because no one wants to actually think about the accounting except the accountants. Maybe they should.

As for your airline comment, do you mean the pilot is more likely to intentionally crash the plane because who cares it's leased and not owned?

I'm not saying this wasn't a long time coming nor am I saying that any of it is a bad idea, I'm just saying the timing sucks for an already broken CRE market that will now have to absorb this pretty significant accounting change.

The FASB and IASB needed to do something which would not irritate the banking industry, so they tinkered with lease accounting, which in my opinion ain't broke. Did you see a 7 September WSJ article about PWC in Russia? Take a look.