Positive Goals

anks, insurance companies, airlines, manufacturers and retailers will be among those most affected by new lease accounting changes once they are formally adopted by the Financial Accounting Standards Board (FASB). And IAMC active members are major lease holders, so the Monday morning Workshop at IAMC's Fall 2010 Professional Forum in Hot Springs, Va., on that topic was standing room only. Bret Hardy, executive managing director, corporate finance, at Colliers International in Los Angeles, was the speaker at the Oct. 4 session. Forty-five minutes was hardly enough time for Hardy to cover the material he intended to cover, let alone answer the steady stream of attendee questions that peppered his presentation.

Under rules in place since the early 1970s, bright-line tests today determine whether leases are to be considered operating or capital. That will change.

"If you subscribe to the notion that leasing is a form of financing, no different than a debt obligation, then that's the reason you should have it on the balance sheet and that it should be shown that it's in the performance metrics of an organization — that's really the core principle of change here," said Hardy at the outset. "Let's get rid of these accounting rules that allow corporate controllers, CFOs — corporations — to engineer results relative to leases."

A Colliers white paper on the topic authored by Hardy puts the impetus behind the change this way: "The objective … is to create a common lease accounting standard to ensure that assets and liabilities arising from lease contracts are uniformly recognized in the financial statements. Current standards allow companies to structure leases to achieve a desired/predetermined lease accounting treatment. The new standard, if adopted, would eliminate that flexibility."

The result of the changes will be a single method of lease accounting, complete and comparable reporting results and a diminished ability to engineer results by doing away with the bright-line tests.

FASB, and the International Accounting Standards Board, also intend to improve financial statements. "Financial statements must reflect the impact of all financings," Hardy illustrated. "The way to do this is the right-of-use model. The balance sheet will now reflect an asset for the right to use leased property; it's going to reflect an obligation for you to pay rent. The goal here is that the relative performance metrics of the organization are now going to reflect these obligations, and they will become much more comparable."

At press time, FASB had issued an Exposure Draft of the new lease standards and was seeking comment letters. The new standard should be complete in 2011 and should take effect in 2012 or 2013.

In the meantime, says Hardy, corporate real estate executives can take several steps to prepare. These include understanding the new standards' details and mechanics, focusing more time and resources on lease administration and accounting, investing in systems to track lease obligations, proactively restructuring long-term obligations, engineering efficiency into the lease decision process and working with finance and treasury to design optimal lease structures and covenants.

— Mark Arend