Extra legwork for the Real Estate Industry

Real estate companies and other lessor organisations around the world—and especially their lessees—face the prospect of fundamental changes in how they account for leases. The current Leases Exposure Draft (ED) outlines proposed changes to Lease accounting standards which will see lessors, their agents and the lessees all impacted.

The new lease accounting standards proposed by the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) are expected to become International Financial Reporting Standards by the end of 2011.*

These standards will most likely create costly process changes for some real estate firms and reshape the accounting models of others—and they have all firms looking for potential real estate market side effects.

Reaction within the real estate sector to the proposed standards and initial deliberations has ranged from annoyance to concern.

The changes stem from concerns about the treatment of lease contracts under the International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP) and seek to address criticism of the current standards that see many leases left off the balance sheet, simply due to different classifications.

The proposed changes will result in adjustments to the statement of financial position to reflect the assets and liabilities arising from all leases, and applies to both new and existing leases.

Sian Sinclair, National Head of Real Estate and Construction Services at Grant Thornton Australia says, “The changes will impact lessors, their agents and the lessees, who will need to rework their data management and accounting process to meet the reporting requirements.  At a minimum, internal staff will need to be trained up on the changes and how to implement them.  For larger businesses with significant lease numbers and commercial agents, it’s likely that software upgrades will be required.” 

Angus Harvey Ross is senior director at CB Richard Ellis, Brisbane, Australia says, “I think it’ll have a substantial impact in both my business and in the business of my clients. We’re already seeing the commencement of it now…. we’re starting to see much more emphasis being brought on to the changes that will take place and how that will affect the portfolios and the balance sheet.”

The changes are also expected to impact lease incentives and could influence the length of leases sought.  Sinclair says, “The ED hasn’t provided detail on the treatment of incentives, but any inducement to sign up for a longer period may mean an extra hit to the balance sheet.  So no doubt we will see new methods of incentive being negotiated once the final terms of the standard are known.”

The changes include defining leases broadly as “the right to use an asset for a period of time in exchange for consideration”, thereby capturing most lease arrangements.  Only reporting entities and those required to apply general purpose financial reporting will be forced to comply with the standard.  However, there has been a specific exclusion for leases with duration of less than 12 months and investment properties if they are recorded at fair value.  So if a company is currently recording investment assets at cost, there is certainly incentive to revisit that.

While the actual date of application won’t be known until the final standard is released, it is expected that 2013/14 will be the earliest this will be brought into effect, meaning firms need to consider what they need to do to get themselves ready for the changes now.

* in late July it was announced that a further exposure draft will be released after September, 2011 which means they may be pushed to get the final product out by the end of 2011.

For further information or for an interview with Sian Sinclair please contact:

Kate Bryant
Horizon Communication Group
T  02 8572 5628 or 0424 186 367
E  kate@horizoncommunication.com.au

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