Lease Accounting Change Update

Corporate real estate professionals are anticipating coming changes to accounting rules with varying degrees of anticipation or dread, as the case may be. This rule change will likely cause all of us to go through a fair amount of technical work to adjust budget planning and compliance activities, but there will also be a significant change to the bottom line and for some that may be troublesome.

What is all this about, you ask? Essentially, this accounting rule change is part of the drive toward increased transparency, one of the outgrowths of various financial scandals over the last several years. The efforts to increase transparency began to pick up steam around the time of the Enron debacle and then kicked into high gear when the government began funding corporate bailouts. Put simply, the changes will capitalize most leases and require that expenses be front loaded as incurred instead of being accounted for on a straight line basis over the life of the lease. The result is likely to be higher balance sheets, increased initial occupancy expenses, higher cash flow and more complex reporting requirements.

• The rule changes are still very much a work in progress. You can access summaries of the process here. 
• See the Lease Accounting Blog for a simplified overview of FASB and IASB discussions and decisions.
• Jones Lang LaSalle’s Mindy Berman has authored a perspective on the impacts changes will have on corporate finance, available here.

The schedule for these changes is not finalized yet but it is assumed they will become operational in 2012, possibly 2013. The remainder of 2010 and 2011 will see continued work between FASB and IASB. Keep a watch on the developing requirements stay informed, and do what you can now to prepare in advance.