Corporate Lease Accounting: The Pending Changes to GAAP Treatment of Leases
How will FASB’s pending changes impact corporations?
Written by Bret Hardy – Colliers Integrated Real Estate Solutions
June 2010
The proposed changes to Generally Accepted Accounting Principles (“GAAP”), when accounting for real estate (and equipment) lease commitments, will significantly change recognition for leases that are now classified as operating leases. Once codified by the Federal Accounting Standards Board (“FASB”), assets will then be classified predicated on a corporation’s “right-to-use” the leased property, whereas a lease liability will be classified based upon a corporation’s obligation to pay rent.
The objective of the lease accounting being considered by FASB and the International Accounting Standards Board (“IASB”), is to create a common lease accounting standard to ensure that assets and liabilities arising from lease contracts are uniformly recognized in the financial statements. Currently, similar transactions can be accounted for very differently. In the eyes of the FASB, this has created difficulty in distinguishing the true financial condition for companies with significant leasehold interests. Additionally, the current standards allow companies to structure leases to achieve a desired/predetermined lease accounting treatment. The new standard, if adopted, would eliminate that flexibility.
In prior project update articles, we specifically dealt with the questions surrounding the importance of the pending revisions to corporate lease accounting rules and to what degree corporations should be concerned with these anticipated changes. In response, many of our corporate clients have been asking astute follow-up questions surrounding these pending GAAP revisions. This updated edition will attempt to provide several key preliminary answers to many of these questions, albeit strictly from the standpoint of the corporate lessee.
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Bret Hardy