New lease accounting standards proposed by the Financial Accounting Standards Board (FASB) may be finalized as early as June 2011, and yet a recent survey by Deloitte found that only 7 percent of executives believe their companies are extremely or very prepared to comply with the changes.
According to Deloitte, the new standards require that lessees (and possibly lessors) would have to fundamentally change how they account for real estate and equipment leasing transactions, providing more extensive financial statement disclosures than ever before. For example, the new standards would effectively eliminate all operating leases and require them to be capitalized. For lessees, it would also replace rent payment expense reporting with interest and amortization expense reporting.
Companies that lease commercial property say they are going to feel the impact on their balance sheets.
More than 80 percent of survey respondents believe that the lease accounting standards will place a significant burden on financial reporting for tenants as well as property owners.
More than 40 percent of respondents believe the new standards would make it more difficult to obtain financing.
In addition, 68 percent of respondents said it would have a material impact on their debt to equity ratio, and roughly 40 percent thought the new lease standard would lead to shorter-term leases.
Many believe the new standards will require IT investment. One-quarter of respondents said their companies are likely to have to make a major upgrade to their information technology systems, while 20 percent said they are likely to acquire a new system. Among companies with 1,000 or more leases, the need for IT investment was even greater. More than one-third (39 percent) of these respondents expect the new standards will lead to a major technology system upgrade, while 27 percent expect to acquire a new system. Only 21 percent of respondents are extremely or very confident in the capability of their companies' information technology provider to comply.
"These changes will have an immense impact on many companies that lease commercial property," said Josh Leonard, with Deloitte's real estate consulting practice. "Beyond the major changes involved, companies need to start looking at their lease portfolios now for adequate lease information, technology capabilities, and resources to implement and monitor the new standard, expected to be final by mid-year 2011."
More information about the new lease accounting standards proposed by the FASB is available here.