Atlanta, GA -- (SBWire) -- 07/23/2010 -- The Financial Accounting Standards Board has been working with the International Accounting Standards Board to develop a new set of common accounting standards that both organizations will adhere to. The new standard will replace FAS 13 in the United States and IAS 17 in countries using international financial reporting standards. The new standards when enacted will have a dramatic impact on how companies look at and record the value of leased equipment and real estate.
The new standard, which will be completed next year and enacted in 2013, will require companies to account for leases as assets and liabilities on their balance sheets.
Current practice is to list these leases as an expense on their P&L reports and as footnotes in their financial statements. In a 2005 report, the Securities and Exchange Commission estimated the value of operating leases held by U.S. publicly traded companies to be $1.3 trillion. Once you factor private companies this number grows to over $2 trillion dollars.
The accounting rule changes will eliminate the distinction between operating leases and capital leases which will place all leases on a company's balance sheet. The proposed changes will eliminate the “90% rule.” Currently, if the present value of lease rental payments is less than 90% of the asset, the lease is considered an operating lease and the lessee simply records the payments as expenses on the income statement. Without this distinction all leases will be placed on the balance sheet.
There is no grandfather clause to these accounting changes so all companies will immediately be faced with having to record rents as a liability on their balance sheet.
This will negatively impact how investors, lenders, and credit agencies view the company. Clearly commercial real estate lease portfolios must be reviewed to insure they do not negatively impact the bottom line or hamper future growth plans.
“Companies that are already struggling from an excessive debt load will be most affected. Another area of concern is banks with multiple branches and retailers with large lease portfolios. Many companies have commercial real estate under long term leases that they no longer use for a number of operational reasons. Their solution in the past was to either hold onto the excess space or try to sublease the space to another firm. With the new lease accounting rules these options will have a greater negative impact," said David Worrell, Principal of Cambridge Consulting Group. “My firm has developed a new strategy for Corporate Real Estate Managers and CFOs to reduce their commercial real estate leasing obligations. This approach has saved companies including Ford Motor Credit, Bank of America and Key Corp millions of dollars by terminating commercial real estate leases for office and industrial space they no longer needed. In the future companies may not have any other option.”
Industry experts suggest that large corporations have their commercial real estate portfolio reviewed by their real estate/financial advisors to avoid potential problems in the future. It will be important to work with firms that have both real estate and corporate finance backgrounds. Cambridge Consulting Group has experience in corporate finance, commercial leasing and real estate tax issues. They are not a real estate practice nor are they affiliated with any landlord or commercial real estate brokerage firms. It may be beneficial to work with an independent consultant that has no business relationships and loyalties to your landlords.
About Cambridge Consulting Group: Cambridge Consulting Group Inc. was formed in 1986 by Managing Director David Worrell. David has been involved in the Corporate Real Estate industry for more than twenty years. Cambridge Consulting was formed to provide financial, real estate, and tax consulting services to corporate real estate executives, chief financial Officers and CEOs of major Fortune 500 Companies and Venture Capital Companies. For the last twenty years Cambridge Consulting Group has successfully helped Corporations and Venture Capital Firms reduce their capital obligations for unneeded commercial real estate. They have personally managed over 500 Negotiated Lease Buyouts. No other company has the knowledge of commercial real estate markets, corporate finance and tax implications that is necessary to successfully renegotiate large lease obligations with landlords.
For more information on Cambridge Consulting Group, please call Managing Director David Worrell at 888-472-5656 or email him at dworrell@ccgimail.com or visit the website Commercial Lease Terminations.
Media Contact: John Davis - Panorama Press - 678.391.9134
New Accounting Standards Will Impact Commercial Real Estate Strategies and the Bottom Line
Commercial real estate leases will be transferred to corporate balance sheets based on planned accounting rule changes.