Study: Lease Accounting Standards Will Cost, Big-Time

WASHINGTON, DC-The Financial Accounting Standards Board and the International Accounting Standards Board are moving closer, albeit slowly and with re-exposed drafts along the way, to their goal of new converged accounting standards for leases.  Although the two accounting-standards setters have re-exposed a draft, thus pushing the day of reckoning off, there is little doubt that it is coming.

Essentially, the standards will require tenants to place leases on their balance sheets—an enormous line item that consists of anything from office, business and farm machinery to, yes, real estate.

The costs to businesses are expected to be enormous. The Equipment Leasing and Finance Association, which has been tracking the issue, notes that leases account for hundreds of billions of dollars in transactions annually throughout the global economy.

Now, a report commissioned by the US Chamber of Commerce, Real Estate Roundtable, Building Owners and Managers Association, International, NAIOP - Commercial Real Estate Development Association, NAIOP - Inland Empire Chapter, NAIOP – Southern California Chapter and National Association of Realtors, takes a look at what the new rules could mean for commercial real estate, specifically. It isn’t pretty.

Chang & Adams Consulting conducted the study. It  found that proposed standards for lease accounting will result in an increase in liabilities of $1.5 trillion; increased costs of $10.2 billion annually; job losses of over 190,000; and a lowered GDP of $27.5 billion annually.

The proposed change could also increase the cost of capital for commercial real estate firms, said Andrew Chang in a conference call explaining the report’s findings, which in turn would have a larger impact on the economy. “We estimate that for every 50 basis point increase, there will be 75,000 jobs lost,” he said.

The report provides best and worst case scenarios—a necessity as the standards are still a work in progress. Indeed, ELFA recently noted that a number of alternatives are being considered by IASB and FASB that would allow lessees to keep a level expense profile as is currently the case with existing operating leases.