<< Back11.16.2010Proposed Changes to Lease Accounting Standards

• The National Association of REALTORS® is opposing lease accounting standard changes proposed by the Financial Accounting Standards Boards (FASB) and the International Accounting Standards Board (IASB) that would treat the income producing real estate business as a financing business on company balance sheets. NAR is concerned that the proposed lease accounting standard changes proposed by FASB and IASB will be detrimental to our nation's economy by reducing the overall borrowing capacity of many commercial real estate lessees and lessors. The proposed accounting changes would treat the income producing real estate business as a financing business on company balance sheets. Such a step would not accurately depict the unique characteristics of the investment real estate sector and in turn discounts the usefulness of the industry's financial statements.
  
  The FASB and IASB proposed lease accounting changes would bring nearly $1.3 trillion in leased assets back onto companies’ balance sheets. If enacted, this proposal could significantly increase companies’ balance sheets, which would reduce the overall borrowing capacity of many commercial real estate lessees (tenants) and lessors (property owners). Due to larger balance sheets, more frugal lessees will want less space and shorter-term leases without renewal options or contingent rents, which will decrease cash flow for property owners. Shorter-term rents will likely reduce the borrowing capacity of many commercial real estate lessors, who rely on leases and the value of the property as collateral in order to obtain financing. This accounting proposal comes at an inopportune time, with nearly $1.4 trillion in commercial real estate loans coming due over the next several years and an already limited capacity to refinance.
  
  While FASB/IASB’s proposal has not been finalized, commercial practitioners are already feeling its negative impact on the way they do business. For example, some REALTORS® have reported that leases will no longer be approved with any option periods by certain companies, which is an important component of the commercial real estate leasing business. Regulatory Outlook: FASB and IASB will accept public comments on their lease accounting proposal until December 15, 2010. Both organizations expect to have their joint proposal finalized by mid-2011. The effective date of this proposal will likely be in 2012 or 2013, where virtually all new and outstanding leases would be subject to the new accounting standard. NAR is currently writing comments to submit to FASB/IASB and will continue to work with other stakeholders to develop a strategy to address this issue.
  
  - National Association of REALTORS
  
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