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STAMFORD, CT-The commercial real estate industry is awaiting–with much trepidation–the forthcoming new draft rules from the Financial Accounting Standards Board on lease accounting. A seemingly arcane bit of accounting, these rules will in fact have a major impact on how tenants and landlords account for leases on their balance sheets.

What the industry already knows about the forthcoming draft suggests the change will not be pretty: there are two changes companies have to worry about. One, all lease obligations are going on the balance sheet–all rent obligations, in other words, will be capitalized as a form of debt financing. The second concern is that the occupancy expense that runs through the P&L will increase substantially, but companies will no longer be able to recognize rent expense. Instead, it will be an amortization of an asset they have. 

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