August 28, 2009—Corporate real estate (CRE) executives are substantially unprepared for a proposed major change in national and international accounting treatment of real estate lease obligations, according to a recent survey by Jones Lang LaSalle and CoreNet Global that revealed 99 percent of respondents had not fully evaluated the impact the proposed change would have on their financial statements and operations.
Companies could receive a massive shock to their businesses, as indicated by two-thirds (66 percent) of the respondents who said the changes would have a significant or major impact on the size of their company’s balance sheets. Eighty-seven percent of respondents agree that they need to learn more about this proposed change soon.
“These new leasing proposals will greatly impact every type and size business in the United States. Whether a firm is public or private, this change would impact literally every item a corporation leases—not just real estate. Everything from computers to trucks, an ATM kiosk to a floor in an office tower, would have to be capitalized on a balance sheet,” said Mindy Berman, Managing Director of Jones Lang LaSalle’s Corporate Capital Markets practice.
“Lease accounting has been a stealth issue in light of immediately pressing business matters in the current economic environment and other major accounting changes that were recently made.”
Under new standards presented on a preliminary basis by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) slated to be issued in 2011, all leases of real estate and equipment will have to be capitalized on a reporting entity’s balance sheet, whether public or private.
The Securities and Exchange Commission estimated in 2005 that U.S. public companies will be forced to capitalize approximately $1.3 trillion in operating leases under the new rules, which would replace FAS 13 and IAS 17 as early as 2012. Industry experts estimate that approximately 70 percent of all operating leases are for real estate, impacting balance sheets by $1 trillion or more.
For more information, see the Jones Lang LaSalle Web site.
