Comments on the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board’s (IASB) lease accounting exposure draft were due in mid-September. Since the release of the proposed rules in May of 2013, over 500 letters were submitted by organizations (world-wide) concerned with the second round of proposed lease accounting changes. FASB and IASB first issued lease accounting changes in 2010, which generated a similar response rate of concerned groups. A final draft by FASB and IASB is anticipated in 2014 and the effective date for implementation is expected for 2017.
The collection period of FASB’s proposed lease accounting changes give off an uneasy feeling for U.S. businesses. Of the 500 comment letters, many organizations remain anxious of the potential costs versus the benefits to change the method lease accounting is reported on balance sheets. FASB began considering lease accounting changes following the financial crisis in 2007. Efforts to prevent a financial meltdown started with transparency which quickly evolved into a change in financial reporting. However, restructuring balance sheets became a calamity resonating across diverse business owners and operators because assets and liabilities would be distorted; therefore, posing a serious threat to the strength of a business.
The 2013 exposure draft released by FASB proposed changes in reporting for real estate and equipment. Real estate would be considered a Type B lease: for the real estate lessee an asset would be recognized as a “right-of-use” asset representing its right to use an underlying asset during the lease term, and a liability to make lease payments. A real estate lessor would apply the operating lease method for Type B leases (the majority of real estate leases) based on the decision to maintain lessee/lessor symmetry in lease classification.
IREM participated in coalitions that submitted comments to FASB and IASB. Concerns specific to the real estate industry were:
- Increase in recorded lessee liabilities would result in unexpected technical violations of financial debt covenants which could give lenders the opportunity to restrict credit availability.
- Lenders will likely require monetary penalties that violate debt covenants.
- Higher cost of lending and reduced availability of credit.
- Increased administrative costs for IT systems, human capital, financial reporting, and accounting functions and internal controls.
- Shorter lease terms by lessees and the reluctance of lessees to agree to renewal options, variable rents. Shorter term leases may result in reduced borrowing capacity for investment real estate.
Overall, if FASB and IASB move forward with lease accounting changes as proposed in the 2013 exposure draft, unintended consequences remain and great risks to the economy outweigh the benefits. IREM government affairs staff will continue to monitor any movement and report back if necessary.