A proposed change to corporate lease accounting rules could have a massive financial impact on companies with lease obligations. The proposed changes are set to alter national and international real estate leases. While not yet approved, the proposed changes (presented by the Financial Accounting Standards Board or FASB and the International Accounting Standards Board or IASB) would, at the earliest, take effect somewhere in mid-2011. The proposed changes are designed to standardize the treatment of leases as financial obligations (much like a mortgage payment) as opposed to an operating expense. The intended result is improved transparency and credibility. But good intentions aside, these changes could cause a major stall to economic recovery.
If approved, the new standards would require all leases of real estate and equipment be capitalized on a reporting entity’s balance sheet and affect both tenants and landlords. The change would apply to public and private businesses and include equipment leases (think copiers, etc) as well as real estate.
2005 estimates from the SEC show U.S. public companies will have to capitalize around $1.3 trillion in operating leases under these proposed changes, with roughly 70 percent of all operating leases for real estate. The impact could be as mush as $1 trillion or more to U.S. businesses.
The timing for this proposed change would overlap with the oncoming wave of maturing commercial loans and could add another 20 feet to the commercial real estate tsunami headed our way.
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