2019 is a big year in lease accounting. In 2019 (which began December 15, 2018 for fiscal year reporters), publicly traded companies are required to comply with the new accounting standard (ASC 842) and are required to recognize leases greater than 12 months on their balance sheet. In 2021 (beginning on December 15, 2020 for fiscal year reporters), all other entities (i.e., private companies including non-profits) will be required to comply with this new standard. Note, given the challenges facing compliance, FASB recently agreed at their July 17, 2019 meeting to extend this effective date for private companies from 2020 to 2021. It is expected that over $2 Trillion will be transferred to US companies’ balance sheets. As I previously wrote (Lease Accounting Change Gets the Go-Ahead ), financial transparency is the driver of this new standard which was developed in the wake of the great recession. “We believe that this new standard is important because it will provide investors, lenders and other users of financial statements a more accurate picture of the long term financial obligations of the companies to which they provide capital,” said FASB Chairman Russell G. Golden. Now that it is official, in this post I highlight what office tenants should be doing to comply with this new standard. I am joined on this post by Mirela Gabrovska of MBG Consulting, a national expert in lease administration and auditing.
On November 11, 2015, the Financial Accounting Standards Board (FASB) decided upon the effective date for the long awaited and much debated new lease accounting standard requiring companies to recognize leases on their balance sheets. The effective date for public companies will be in fiscal years (including interim periods within those years) beginning after December 15, 2018. The effective date for private companies will be for annual periods after December 15, 2019. Upon issuance of the final standard, which is expected to be early 2016, FASB allows for early adoption which some companies will do to meet SEC requirements.
Responding to the need for greater transparency in financial markets in the post-Enron era, a new accounting standard is being presented requiring tenants (both public and private companies) to recognize the current and future value of all leases on their balance sheets. This standard is jointly presented by FASB (Financial Accounting Standards Board) and IASB (International Accounting Standard Board). The proposed standard, if enacted, will be a factor in the real estate decision-making process for all companies. It will have a major impact on financial statements of companies with large lease obligations which are currently considered “Operating Leases”. While this proposed standard applies well beyond the lease of real property, my focus is on its impact to tenants in office leasing. It has been reported that this change will result in between $1 and $2 Trillion being transferred to companies’ Balance Sheets. Some question the timing of this proposed change given the economic conditions and the state of the commercial real estate industry.
All forward thinking tenants should review with their real estate advisor how the proposed standard will impact their real estate strategy. Below is a summary of the current accounting standard, the proposed new standard and its impact on office tenants.