Decision Could Increase Pressure On Rule Makers to Also Scrap Accounting Changes For Commercial Tenants – Commercial property owners and landlords have been excluded from accounting standards changes that would require companies to capitalize real estate and equipment leases on their balance sheets.
The International Accounting Standards Board (IASB) and the U.S.-based Financial Accounting Standards Board (FASB) signaled at their meetings Oct. 19-20 that they will exclude lessors and owners of investment properties from the proposed rules. The panels expect to issue a revised exposure draft of the lease accounting standard in the first half of next year, with adoption of a final standard targeted for the second half of 2012.
In response to the heavy volume of complaints from business groups about the controversial rule changes, the FASB and IASB decided in July to reissue a new exposure draft on the proposed new standard, first released in August 2010.
While the Real Estate Roundtable, which formed a coalition with the National Association of Real Estate Investment Trusts (NAREIT) and other business groups to oppose the lease accounting rule overhaul, welcomed the exemption for property owners, it noted that tenants who continue to face “far-reaching and negative implications for commercial real estate and the economy” remain at risk under the proposed standard.
In particular, the Roundtable said the revised accounting rules could motivate tenants to seek shorter lease terms without renewal terms or rent contigencies to avoid complicated financial reporting and forecasting requirements.
“Commercial property tenants would remain subject to the pending new lease accounting requirements, which would eliminate off-balance-sheet treatment for operating leases and re-characterize the income-producing real estate business as a financing business” on balance sheets, the advocacy group said in a statement.
Specifically, the FASB and IASB on Oct. 19 opted to broaden the scope of an exception for lessors who use fair-market accounting, contained in the original August 2010 exposure draft, to include all leased assets that meet the definition of “investment property” under U.S. or international accounting guidance, according to an analysis by PwC (PricewaterhouseCoopers). Under U.S. guidance, this would likely include real estate, improvements and major equipment, whose owners would continue to apply the current operating lease accounting standard.
A majority of FASB members in October expressed a preference to reconsider tenant accounting for leases of investment property, while a majority IASB members preferred not to reconsider lessee accounting. The FASB did not indicate when it would initiate the reconsideration.
Such a discussion could further push back publication of the revised exposure draft by the joint boards. Once the boards complete deliberations, they will issue the draft for public comment.
Issuance of a final standard is currently targeted for the second half of 2012. However, the effective date has not yet been decided and won’t likely be before 2015, PwC said.
In a related action Oct. 21, FASB issued exposure drafts on two additional proposed accounting standards updates (ASUs) to develop guidance and improve financial reporting for investment property entities, and define whether an entity is an investment company.
One ASU, titled Topic 973, would require an entity that meets certain criteria to measure its investment properties using fair-value accounting, rather than to apply lease accounting guidance to each individual lease. It would also create additional presentation and disclosure requirements for an investment property entity.
The update is a result of FASB’s effort to determine the scope of investment entities that would apply the proposed lessor accounting model under U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS).