With the August 17, 2010 issuance of both the FASB’s and IASB’s respective Exposure Draft (“ED”) documents on the proposed new lease accounting standards, tenants were provided with a clearer picture of how the new accounting standards will likely apply. The major change for corporate lessees will be that their lease obligations (at least those with a maximum term of greater than one year), will now impact their balance sheets, income statements and EBITDA calculations. However, there are other important provisions within the newly proposed ED which tenants should pay close attention to if their goal is to minimize the amount of the lease obligations which impact their balance sheet.

 

Others have advised tenants their lease payments related to the landlord’s property tax and insurance costs would be treated as “executory costs” and thus not be capitalized. FASB says otherwise. Instead, if the existing ED remains unchanged, tenants will have to capitalize not just their “net rent”, but also the portion of their lease payments related to taxes and insurance. Additionally, they will also be required to adjust those capitalized amounts each year based on the expectation of future fluctuations in the property tax and insurance charges incurred by their landlord. The impact on the balance sheet from just this one aspect of the newly proposed accounting standards is anywhere between $3 and $10 per square foot per year over the term of the lease depending upon the building, tax jurisdiction, insurance risk profile and lease provisions.

 

• What will you tell your CFO when your balance sheet is impacted by a tax reassessment or from insurance market fluctuations? Are you prepared?
• How will you manage the risks and expectations of balance sheet impact on a proactive and accurate basis, while providing finance / ownership with reliable data?
• How long will it take you to prepare the detailed reports necessary to satisfy the annual audit and how will you manage the annual revision process?
• What can you do to mitigate the effect of the new accounting standards in new and existing leases?

 

Aside from the important answers to these questions, there are nine important considerations you should be aware of going forward…