WASHINGTON, DC-Inflated balance sheets. The move away from cash accounting to an accrual-based one. Long-winded explanations for lenders about what it all means. This is what is in store for the commercial real estate community--indeed all sectors of the economy that make use of a balance sheet--due to pending changes in several areas.

Unfortunately, certainty is not coming any time soon and could in fact take years. The bottom line for companies now, Donald A. Greenhalgh, a CPA with the Boston-based DiCicco, Gulman & Co., tells GlobeSt.com, is to continue making decisions as they always have done. “Focus on the economic and market issues first, then the accounting or tax issues.” That should always be the case anyway, he says, but particularly now as standard-setting is still in a state of flux. Making a market-oriented decision--say, whether to sign a long-term lease or a short-term leased based on what might happen with the lease accounting regulations, he said, is a sure way to make a mistake.

Still, though, that doesn’t mean companies shouldn’t be monitoring the situation. On the immediate radar are two accounting standards that are due for a change under the joint proposals between the Financial Accounting Standards Board and the International Accounting Standards Board. These are for revenue recognition and lease accounting. Both of these proposals’ drafts have been re-exposed--meaning they have been resubmitted for public comment--putting off the earliest implementation for at least a couple of years.

Still, that doesn’t mean they shouldn’t be monitored. The lease accounting change would have the greatest impact, hence its close monitoring by accountants, real estate firms and investors. For the most part, lease accounting for tenants appears to be decided, Greenhalgh says, despite the re-exposure. “Tenants will still have to put leases on their balance sheet. That core issue has been decided. But IASB and FASB haven’t come out with proposed standards on the landlord side. They have only started discussion.” It is assumed that the standard for landlords will run parallel to the one for tenants, he says, but one never knows. If it does, though, it will have a huge impact on privately-owned real estate and not necessarily REITs, whose FFOs will remain unaffected, he says.

Another item of interest is a change that the boards have indicated they are willing to consider, Adam Brown, partner with BDO USA in Dallas, tells GlobeSt.com. “Because the leases will be on the books, companies want to separate out anything that is not part of the rent. This includes insurance, taxes--anything like that that is baked into the lease. If those are loaded in as well, you will have a bigger balance sheet. The boards have indicated they are receptive to having those carved out.”

Instant Insights /

Still Waiting on the Standards Setters

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