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Lease Accounting

The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) issued a revised proposal on May 16, 2013, regarding the accounting treatment and reporting for leases, as part of their larger accounting standards convergence project.  The first exposure draft was released in 2010. Both FASB and IASB believe these changes would improve transparency as well as provide investors with more consistent and concise financial reporting.

However, if ratified, this proposal would hurt businesses of all sizes, especially lessees and lessors of commercial real estate. The proposal would bring nearly $1.3 trillion in leased assets back onto companies’ balance sheets, with roughly 70% being real estate leases. The new lease accounting proposal reduces the overall borrowing capacity of many commercial real estate lessees and lessors, by requiring them to recognize leases on their balance sheets as liabilities and assets, as opposed to their current treatment as operating expenses, which are not reflected on balance sheets. Including leases on balance sheets may have the effect of “bloating” them, and some companies may see their debt-to-equity ratios increase as a result, making it more difficult for them to get credit.

FASB/IASB finalized their proposal in 2016. The effective date of the new standard is 2019 for public companies and 2020 for private companies.

The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB), the two standard-setting organizations for accounting, have been engaged in a multi-year effort to converge many accounting standards. The lease accounting standards convergence project began in 2006 and is ongoing today.

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