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Showing posts with label Lease Accounting Changes. Show all posts
Showing posts with label Lease Accounting Changes. Show all posts
Monday, April 4, 2011
Thursday, March 31, 2011
How Will Lease Accounting Changes Impact Sale/Leaseback Transaction
Many CFOs have realized many benefits in the past from sale/leaseback transactions. Selling Commercial property and leasing it back has allowed many companies to free capital that has been tied to real estate and redeploy this capital more strategically. New lease accounting changes may change this market dramatically. This topic was recently addressed in an article In CFO Magazine.
Space Race
By Russ Banharn
...All of this would sound even better if it were not for the proposed changes to lease accounting currently on the table. The Financial Accounting Standards Board and the International Accounting Standards Board have both proposed major alterations in lease accounting (see "Taking the 'Ease' Out of 'Lease'?" December 2010). Under the proposals, tenants would be required to place the obligation to pay rent over the entire lease term on their balance sheets as a liability. Right now, only the current rent is booked on the financials, as an expense on the income statement. Many observers predict these changes will be adopted.
If so, those companies seeking to spruce up their balance sheets by eliminating mortgage-debt obligations through a sale-leaseback may change their minds, since a lease liability would effectively treat all leases as a capital lease, which would gum up the balance sheet. "If a company is trying to raise capital, a sale-leaseback would still be a very viable option," says NorthMarq's Houge. "But the proposed changes to the accounting standards will affect other agreements, such as credit agreements requiring a minimum debt coverage ratio, and that could be a problem."
Others predict that future sale-leaseback deals will involve shorter-term leases, in the 3-to-5-year range. "If the rules change, the longer the lease, the greater the liability, so companies may want shorter leases than the typical 10-to-20-year term that makes sale-leasebacks work," says White of Real Capital Analytics. "It comes down to a financial decision: if you can borrow unsecured debt cheaper than what a real estate investor is offering, you may pass."
to read the full article please visit
http://www.cfo.com/article.cfm/14550844/3/c_14551704?f=search
Space Race
By Russ Banharn
...All of this would sound even better if it were not for the proposed changes to lease accounting currently on the table. The Financial Accounting Standards Board and the International Accounting Standards Board have both proposed major alterations in lease accounting (see "Taking the 'Ease' Out of 'Lease'?" December 2010). Under the proposals, tenants would be required to place the obligation to pay rent over the entire lease term on their balance sheets as a liability. Right now, only the current rent is booked on the financials, as an expense on the income statement. Many observers predict these changes will be adopted.
If so, those companies seeking to spruce up their balance sheets by eliminating mortgage-debt obligations through a sale-leaseback may change their minds, since a lease liability would effectively treat all leases as a capital lease, which would gum up the balance sheet. "If a company is trying to raise capital, a sale-leaseback would still be a very viable option," says NorthMarq's Houge. "But the proposed changes to the accounting standards will affect other agreements, such as credit agreements requiring a minimum debt coverage ratio, and that could be a problem."
Others predict that future sale-leaseback deals will involve shorter-term leases, in the 3-to-5-year range. "If the rules change, the longer the lease, the greater the liability, so companies may want shorter leases than the typical 10-to-20-year term that makes sale-leasebacks work," says White of Real Capital Analytics. "It comes down to a financial decision: if you can borrow unsecured debt cheaper than what a real estate investor is offering, you may pass."
to read the full article please visit
http://www.cfo.com/article.cfm/14550844/3/c_14551704?f=search
Wednesday, December 29, 2010
CCIM Magazine Covers New Lease Accounting Rules in Current Issue
Counting Leases Before They Hatch
A proposed accounting change will dramatically affect how landlords and tenants treat leases.
by Tom Muller
The accounting profession is currently evaluating a proposed new standard that promises to fundamentally change the ways landlords and tenants account for — and negotiate — leases.Under review is a proposed rewriting of the Financial Standards Accounting Board’s Accounting Standards Codification Topic 840, which before 2009 was known as FAS 13. This topic, "Accounting for Leases," is one of many standards that together comprise generally accepted accounting principles, or GAAP, in the United States.
The draft standard has drawn much heated debate for its potential to fundamentally change the leasing market, likely shortening lease terms and dramatically reducing the apparent value of properties with traditionally long lease terms, such as office buildings.
What Is Being Proposed?
According to FASB, the proposed new rule responds to dissatisfaction with the way that operating leases are disclosed on companies’ financial statements. Current financial standards draw a distinction between operating leases — the standard landlord/tenant relationship — and capital leases, typically used as an alternative form of financing. Current rules effectively ignore the documented structure of capital leases, instead treating the leased property as if it were owned by the tenant and financed by the landlord.
FASB notes that many companies have carefully structured their leases in view of the current rules to achieve characterization as either operating leases or capital leases, resulting in strikingly different effects on the company’s financial statements. The proposed rules to a large degree would prevent this by treating all leases with a term over one year as capital leases.
The proposed new standard treats the execution of a lease as the conveyance to the tenant of an asset — the right to use the property — and the creation of a liability — the obligation to pay rent over the term. The standard creates one analysis for the inception of the transaction and a slightly different one for ongoing reporting. It also requires both landlord and tenant to adjust underlying assumptions about the future of the lease as facts that might affect those assumptions change.
Tenant Changes
For the tenant the new standard would require the following considerations.
* At the beginning of the lease, the tenant must recognize as a liability the present value of all lease payments it is obligated to make, taking into account any extension or termination options it is likely to exercise, and estimating any contingent rent or termination payments it expects to make. The discount rate to be used for the present value calculation is the interest rate the tenant would have to pay a lender for a comparable real estate secured loan.
* The tenant recognizes the right to use the property for the term of the lease as an asset, measured, at the beginning of the lease, at the present value of the lease payments, plus the “initial direct costs” it incurs in negotiating the lease, for example, broker’s commissions and legal fees.
* During the term of the lease, the tenant amortizes the right to use the property over the shorter of its remaining useful life or the term of the lease.
* During the term of the lease, the tenant must reflect any changes as they occur. For example, if, a few years into the lease, a tenant’s business changes so as to make it likely that it will pay more contingent rent over the term of the lease, its financial statements must immediately reflect that change. Or, if a change in the tenant’s business makes it more likely that it will not exercise an extension option it previously expected to exercise, it may be required to adjust its financial statements to reflect that.
CFO Best Practice Sponsor:
Cambridge Consulting Group was formed more than 10 years ago to help large organizations reduce their costs by eliminating their leasing obligations for excess commercial real estate space. Founded by Dave Worrell, a former Corporate/Facility Director, Cambridge Consulting Group offers companies a better option than subleasing office space they no longer need or use. Using a newer financial strategy- Negotiated Lease Buyouts, Cambridge Consulting has saved Fortune 500 companies millions of dollars in commercial lease obligations. For more information please visit their website- www.ccgiweb.com
to read the full article please visit www.cire.com
A proposed accounting change will dramatically affect how landlords and tenants treat leases.
by Tom Muller
The accounting profession is currently evaluating a proposed new standard that promises to fundamentally change the ways landlords and tenants account for — and negotiate — leases.Under review is a proposed rewriting of the Financial Standards Accounting Board’s Accounting Standards Codification Topic 840, which before 2009 was known as FAS 13. This topic, "Accounting for Leases," is one of many standards that together comprise generally accepted accounting principles, or GAAP, in the United States.
The draft standard has drawn much heated debate for its potential to fundamentally change the leasing market, likely shortening lease terms and dramatically reducing the apparent value of properties with traditionally long lease terms, such as office buildings.
What Is Being Proposed?
According to FASB, the proposed new rule responds to dissatisfaction with the way that operating leases are disclosed on companies’ financial statements. Current financial standards draw a distinction between operating leases — the standard landlord/tenant relationship — and capital leases, typically used as an alternative form of financing. Current rules effectively ignore the documented structure of capital leases, instead treating the leased property as if it were owned by the tenant and financed by the landlord.
FASB notes that many companies have carefully structured their leases in view of the current rules to achieve characterization as either operating leases or capital leases, resulting in strikingly different effects on the company’s financial statements. The proposed rules to a large degree would prevent this by treating all leases with a term over one year as capital leases.
The proposed new standard treats the execution of a lease as the conveyance to the tenant of an asset — the right to use the property — and the creation of a liability — the obligation to pay rent over the term. The standard creates one analysis for the inception of the transaction and a slightly different one for ongoing reporting. It also requires both landlord and tenant to adjust underlying assumptions about the future of the lease as facts that might affect those assumptions change.
Tenant Changes
For the tenant the new standard would require the following considerations.
* At the beginning of the lease, the tenant must recognize as a liability the present value of all lease payments it is obligated to make, taking into account any extension or termination options it is likely to exercise, and estimating any contingent rent or termination payments it expects to make. The discount rate to be used for the present value calculation is the interest rate the tenant would have to pay a lender for a comparable real estate secured loan.
* The tenant recognizes the right to use the property for the term of the lease as an asset, measured, at the beginning of the lease, at the present value of the lease payments, plus the “initial direct costs” it incurs in negotiating the lease, for example, broker’s commissions and legal fees.
* During the term of the lease, the tenant amortizes the right to use the property over the shorter of its remaining useful life or the term of the lease.
* During the term of the lease, the tenant must reflect any changes as they occur. For example, if, a few years into the lease, a tenant’s business changes so as to make it likely that it will pay more contingent rent over the term of the lease, its financial statements must immediately reflect that change. Or, if a change in the tenant’s business makes it more likely that it will not exercise an extension option it previously expected to exercise, it may be required to adjust its financial statements to reflect that.
CFO Best Practice Sponsor:
Cambridge Consulting Group was formed more than 10 years ago to help large organizations reduce their costs by eliminating their leasing obligations for excess commercial real estate space. Founded by Dave Worrell, a former Corporate/Facility Director, Cambridge Consulting Group offers companies a better option than subleasing office space they no longer need or use. Using a newer financial strategy- Negotiated Lease Buyouts, Cambridge Consulting has saved Fortune 500 companies millions of dollars in commercial lease obligations. For more information please visit their website- www.ccgiweb.com
to read the full article please visit www.cire.com
Monday, December 13, 2010
Software Programs Help Companies Prepare for New Lease Accounting Changes
Originally published in National Real Estate Investor
By James Duport and Ken Brown
Big changes are on the way for companies that are significant holders of real estate. It’s hard to say exactly when the much talked about and anticipated FASB lease accounting changes will go into effect, but companies with real estate holdings in particular need to be prepared for the significant impact these new rules will have on lease commitments.
Change is never easy, but the transition doesn’t have to be traumatic. On the contrary, required adherence to these new FASB rules, which are being put in place to enforce transparency and full disclosure, actually has a silver lining. It presents the opportunity for companies to update software and technology, which may be outdated anyway, in order to manage their real estate holdings and move to a faster, broader, more accommodating and flexible system.
Under the new proposed law, lease commitments must be on the balance sheet from day one, which is why older technology will no longer do the job. But, before we address effective ways for companies to achieve leasing compliance, it is important to first understand why the laws of lease accounting are changing.
Current lease accounting guidelines were adopted 30 years ago and are outdated by today’s business standards. The biggest difference between the old and new rules pertains to off-balance sheet accounting. The proposed new rules will bring all assets currently under lease onto the balance sheet and take into account international real estate portfolios, too. The new rules will also include a single worldwide leasing standard, which is important as real estate companies continue to go global.
For most companies, and especially those with large, international real estate portfolios, the sheer thought of overhauling the leasing structure of all their properties is overwhelming. But, thankfully, the implementation of advanced lease administration technology can successfully support a company through this process.
It will be difficult, if not impossible, to become compliant with the new lease accounting laws without some level of lease administration software support. When considering which software to implement, be sure the product is Web-based and that it provides a system of record for all of the leased real estate assets.
That includes leases, subleases, purchase agreements, franchise agreements, equipment leases and more. Be sure the software is completely transparent with regard to location information, critical dates and expenses, and that it integrates workflow.
It should have the ability to create pro-forma leases and integrate MS Excel financial models. It should also be able to handle complex reporting and compare multiple lease financials to support decision-making, and standardize all leases in a portfolio to streamline the cumbersome process.
It’s a lot to take into consideration, but there are companies that have been anticipating these changes and updated their technology with the new FASB rules in mind. The right technology should make life easier.
You can audit your current lease administration system and take stock of all of the capabilities you need and would like in an updated product. Then, do the research to locate the technology that will work best with your real estate and lease commitments.
It’s no secret that the new FASB rules promise to radically transform lease accounting and if you are a significant user of real estate, they will radically transform the way you do business, too. But there are lease administration software programs on the market that will make it easier to deal with many of the initial challenges that accompany such a transition.
Jim Duport is the creator and lead developer of Lucernex Technologies Lx LseMod products and the Lucernex financial engine. He created v15, set for release later in the fourth quarter, to support potential FASB changes. Lx LseMod is a corporate lease analysis tool used by companies including GE, MetLife, Robert Half, Cigna, National Semiconductor, United Technologies, Yahoo and Intuit.
Ken Brown designed mass market software in the 1980s and designed SLIM lease administration software. He is executive vice president and CIO of Lucernex and head of Lucernex product development.
By James Duport and Ken Brown
Big changes are on the way for companies that are significant holders of real estate. It’s hard to say exactly when the much talked about and anticipated FASB lease accounting changes will go into effect, but companies with real estate holdings in particular need to be prepared for the significant impact these new rules will have on lease commitments.
Change is never easy, but the transition doesn’t have to be traumatic. On the contrary, required adherence to these new FASB rules, which are being put in place to enforce transparency and full disclosure, actually has a silver lining. It presents the opportunity for companies to update software and technology, which may be outdated anyway, in order to manage their real estate holdings and move to a faster, broader, more accommodating and flexible system.
Under the new proposed law, lease commitments must be on the balance sheet from day one, which is why older technology will no longer do the job. But, before we address effective ways for companies to achieve leasing compliance, it is important to first understand why the laws of lease accounting are changing.
Current lease accounting guidelines were adopted 30 years ago and are outdated by today’s business standards. The biggest difference between the old and new rules pertains to off-balance sheet accounting. The proposed new rules will bring all assets currently under lease onto the balance sheet and take into account international real estate portfolios, too. The new rules will also include a single worldwide leasing standard, which is important as real estate companies continue to go global.
For most companies, and especially those with large, international real estate portfolios, the sheer thought of overhauling the leasing structure of all their properties is overwhelming. But, thankfully, the implementation of advanced lease administration technology can successfully support a company through this process.
It will be difficult, if not impossible, to become compliant with the new lease accounting laws without some level of lease administration software support. When considering which software to implement, be sure the product is Web-based and that it provides a system of record for all of the leased real estate assets.
That includes leases, subleases, purchase agreements, franchise agreements, equipment leases and more. Be sure the software is completely transparent with regard to location information, critical dates and expenses, and that it integrates workflow.
It should have the ability to create pro-forma leases and integrate MS Excel financial models. It should also be able to handle complex reporting and compare multiple lease financials to support decision-making, and standardize all leases in a portfolio to streamline the cumbersome process.
It’s a lot to take into consideration, but there are companies that have been anticipating these changes and updated their technology with the new FASB rules in mind. The right technology should make life easier.
You can audit your current lease administration system and take stock of all of the capabilities you need and would like in an updated product. Then, do the research to locate the technology that will work best with your real estate and lease commitments.
It’s no secret that the new FASB rules promise to radically transform lease accounting and if you are a significant user of real estate, they will radically transform the way you do business, too. But there are lease administration software programs on the market that will make it easier to deal with many of the initial challenges that accompany such a transition.
Jim Duport is the creator and lead developer of Lucernex Technologies Lx LseMod products and the Lucernex financial engine. He created v15, set for release later in the fourth quarter, to support potential FASB changes. Lx LseMod is a corporate lease analysis tool used by companies including GE, MetLife, Robert Half, Cigna, National Semiconductor, United Technologies, Yahoo and Intuit.
Ken Brown designed mass market software in the 1980s and designed SLIM lease administration software. He is executive vice president and CIO of Lucernex and head of Lucernex product development.
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