Magazine article Journal of Property Management

Financial Accounting Standards Board

Magazine article Journal of Property Management

Financial Accounting Standards Board

Article excerpt

IREM GOVERNMENT AFFAIRS

The widespread availability of financing has been one of the keys to the nation's economic recovery. That same financing may soon be more difficult to come by due to a change in accounting procedures. The old standard that has been in place since the 70s accounted for various types of leases in different ways. Capital leases, such as equipment that was leased for nearly all of its useful life, would be recognized on a balance sheet. Other leases, such as an office space, were classified as operating leases and were not recognized as assets or liabilities on balance sheets. In 2005, the U.S. Securities and Exchange Commission recommended a renewed approach to lease accounting guidance. Since then, the Financial Accounting Standards Board (FASB) has been working with the International Accounting Standards Board (IASB) to create a new standard that addressed leasing.

IREM'S STANCE

In 2010, the FASB released a first draft of the new accounting standards, followed by a second draft in 2013. The final draft was released in December of 2015, and it was officially published in February of 2016. IREM has been, and continues to be, heavily involved in the formulation of the new standard. It is IREM's position that these changes are not only unnecessary, but also potentially harmful. While IREM appreciates intentions of increasing transparency and comparability, we feel this standard may have a widespread detrimental impact on IREM Members.

Until the new standard is implemented, leases are considered an operating expense and therefore not required to be shown on balance sheets. By including leases as liabilities on balance sheets, businesses will dramatically increase their apparent liabilities, and in turn, will reduce their debt to equity and return on assets ratios making them appear to be less stable than before the accounting change. There will be no actual change to the companies' income, expenses, liabilities, leases or anything else. The only difference will only be the way of accounting for leases.

WHAT THIS MEANS

According to the Wall Street Journal, this lease accounting change will increase companies' liabilities by nearly $2 trillion. In a 2012 study conducted by Chang & Adams Consulting, it was predicted this could result in a loss of between 190,000 and 3.3 million jobs. The study further suggests that in a best case scenario, U.S. Gross Domestic Product could decrease anywhere from $27.5 billion to $478.6 billion annually.

All companies following the U.S Generally Accepted Accounting Principles (GAAP) will be required to follow this new standard. The new standard will affect all leases except short-term leases of 12 months or less. …

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