June 28, 2016
HOUSTON – The Financial Accounting Standards Board (FASB) issued new accounting standards in February 2016 to improve financial reporting on lease transactions, clearing the way for organizations to adopt new strategies pertaining to their real estate leases. The much-anticipated accounting changes introduce a multitude of scenarios to consider as lease contracts assume a more material role on corporate financial statements.
Mike McLain, Transwestern’s chief accounting officer, outlines lease accounting changes and their potential impact on real estate occupiers and owners.
• New regulations will require occupiers to decide whether to structure their leases to obtain finance or operating lease accounting treatment. This could result in lease negotiations requiring more time and additional advisors.
• Choosing the best option can be determined with the company’s financial metrics that they feel are important, such as the method(s) utilized to value the firm.
• A company whose financial performance is measured by EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) may benefit from structuring real estate leases to achieve finance lease treatment because the lease expenses would not be included into EBITDA. Rather, they would be seen as interest and amortization.
• Adding leases to the balance sheet can impact a company’s debt-to-equity ratio, which may cause the ratio to shift out of compliance with what is allowed in its loan covenants.
• Building owners can expect to see banking institutions, financial service firms and other enterprises seek out shorter leases with potentially fewer renewal options due to requirements for them to have a certain amount of capital reserves in proportion to their liabilities.
• If a building owner offers the occupier a discounted rate in connection with a possible lease extension at the end of the term, that “economic incentive” could impact how the lease is classified beginning on Day One.
• The changes likely will not spark an extensive movement of companies opting to buy their own real estate rather than continuing to lease.
Read more insights and specific examples in Transwestern’s “Ask the Expert” publications:
• Tenant edition: http://twurls.com/ate-lease-accounting
• Owner edition: http://twurls.com/ate-lease-accounting-ll
Transwestern is a privately held real estate firm of collaborative entrepreneurs who deliver a higher level of personalized service – the Transwestern Experience. Specializing in Agency Leasing, Management, Tenant Advisory, Capital Markets, Research and Sustainability services, our fully integrated global enterprise adds value for investors, owners and occupiers of all commercial property types. We leverage market insights and operational expertise from members of the Transwestern family of companies specializing in development, real estate investment management and research. Transwestern has 34 U.S. offices and assists clients through more than 180 offices in 37 countries as part of a strategic alliance with BNP Paribas Real Estate. Experience Extraordinary at transwestern.com and @Transwestern.