Browse Tag: FASB

New FASB Standards Likely To Shorten Lease Terms

For some entities’ fiscal years beginning after December 15, 2018, we can expect to see the appearance of new property lease standards as enforced by the Financial Accounting Standards Board. Commercial real estate industry lease agreements will be subject to a new accounting standard intended to force the recognition of leases that run longer than twelve months as assets or liabilities on the books.

That’s not to say the new standards exempt leases that run shorter than one year — lessees may choose to not record an asset or liability for a lease a) whose term runs less than twelve months and b) that includes no purchase option that the lessee is reasonably likely to activate.

Minimizing the impact

The landlord side of the negotiation table is likely to be faced with pressure to reduce the lease term so as to retain the flexibility afforded by lease accounting under the old standards.  Prior to the new standards, leases were not commonly characterized as assets or liabilities and as such could be arranged relative to an owner’s bottom line with much more latitude than is offered today.

A major segment of the property leasing world impacted by the standards is tenants at the crossroads considering wether to rent or buy.  As Howard Barash of CohnReznick writes in National Real Estate Investor:

Preparing for, and complying with, the new leasing standard is not all bad news. In fact, smart businesses should treat the implementation of the new standard as an opportunity to re-evaluate, and then optimize, their leasing strategies. Companies should closely examine their current leasing contracts. They should also revisit their lease vs. buy decision criteria in light of the standard to determine which option makes the most sense for their business.

The implementation deadline for the new FASB lease standard is approaching and will be here before we know it. It will impact most businesses well beyond an accounting exercise. As such, now is the time for your business to examine its leasing process and gain input from your key business leaders.

 

Getting In Front Of Lease Accounting Rules Changes

The recently announced Financial Accounting Standards Board changes to lease accounting won’t be in effect for three to four more years, but their potential impact on commercial real estate portfolios could be significant. New business could be the result — moving multi-year leases around on the balance sheet could tip said balances enough to prompt a round of property purchases or consolidations. Complying with the new changes could mean that and more for landlords — and the professional services that go with compliance are sure to be in a bit greater demand as the rules burn into business plans.

Talking a bit about potential impacts and timeframes is NAR Commercial Regulatory Policy Representative Stephanie Spear, who appears in a quick video outlining the changes potentials from the perspective of the commercial real estate industry.

CCIM Professional Education on FASB Lease Accounting Changes

It’s no surprise that CCIM Institute is on the case with instructor-led education on the lease changes and their connections to commercial property.  After the jump, check out the course offerings by instructor Peter Barnett, PwC’s Director Of Real Estate.

Live Webcast From FASB On Lease Accounting Standards Update

Got questions abut the recent big changes in lease accounting standards?  Mark the date:  March 29, 2016, the Financial Accounting Standards Board (FASB) will host IN FOCUS: FASB Accounting Standards Update on Leases, a live webcast taking place from 1:00 to 2:00 p.m. EDT. The webcast will feature FASB Members Marc Siegel and Daryl Buck discussing the update in lease accounting standards with FASB staff, and answering questions submitted by viewers. Live broadcast viewers will be eligible for up to 1 hour of CPE credit. For more information or to register for the free event, click here.

Further information about the ASU—including a FASB In Focus overview, a FASB: Understanding Costs and Benefits document, and a video titled Why a New Leases Standard? —is available at www.fasb.org.

 

NAR Commercial Podcast: FASB Lease Accounting Update, TRIA Up For Reauthorization

NAR's Bill ArmstrongIn the latest NAR Commercial Podcast, Bill Armstrong brings us up to date on new developments in lease accounting and on terrorism insurance legislation.  The highlights:

FASB/IASB Lease Accounting: Is The Straight Line Expense Method In The New Rules? 

The Federal Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) will be reissuing a set of proposed rules for lease accounting. Known as an exposure draft, the proposed rules are sked to be issued in May. It’s been two and a half years since the original rules were issued in August 2012.  While not a done deal yet, it looks as though FASB  and IASB are moving toward a straight line expense method, which is similar to the current lease accounting rule.

We don’t know exactly what will be in the draft, said Bill,  but all indications appear that straight line accounting method is preferred by both boards. And that would be very good news for commercial REALTORS®.

On the other hand, the boards are also moving to capitalization of leases, except for leases of less than 12 months. The capitalization of leases could be problematic for property owners,  because more bloated balance sheets could appear as larger debt with could hurt financing opportunities among other things.  As the new proposed rules are released in May, you can be sure NAR will be the first to comment on these rules, as NAR wants to ensure the rules accurately depict the unique character of commercial real estate.

TRIA Terrorism Insurance Legislation Up For Renewal

Bill: “I’d like to touch on a new piece of legislation that’s been introduced that provides for risk insurance for business in the event of an act of terrorism. The attacks of 9/11/01 not only had a profound effect on our nation’s spirit, but they also produced an enormous economic impact., the loss of a million jobs, the delay or cancellation of $15 bilion in real estate transactions, and a 6-year low in commercial construction.  Out of the nation’s loss, the Terrorism Risk Insurance Act (TRIA) was enacted in 2002. TRIA protects consumers, business, the overall economy and nation by providing adequate levels of property and casualty insurance for the nation’s small and large businesses in the wake of a catastrophic terrorist attack.

The program has helped protect billions of dollars in new construction and created thousands of new jobs. Reauthorized twice in 2005 and 2007. TRIA is set to expire at 2104 unless Congress act to reauthorize.   In fact, the looming expiration date has already begun to affect the availability of some commercial loans.  Just last month, Rep Michael Grimm of NY and other House lawmakers introduced legislation to reauthorize the program through 2019.

Bill: “This legislation must be passed. Without TRIA, the private insurance market won’t pick up the slack. Here’s why: terrorism is a unique, man-made risk that’s impossible to predict in terms of timing, location or magnitude of attack. In short, major terrorism isn’t an insurable risk, at least not for the private sector. Nearly all isnurers wil exclude terrorism coverage for large or high-profile commercial riss. Only the federal government is aware of an can fully protect against terrorist threats. In addition, only the government has the capacity to provide the needed levels of this type of insurance. Without it our economy, jobs and well-being will remain vulnerable to terrorists who hope to destroy us financially.  That’s why its so important that TRIA be reauthorized. Reauthorization means coverage will continue so that business wil continue.

Follow the jump for the complete Bill Armstrong podcast.

 

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Latest NAR Commercial Podcast From Bill Armstrong

Picture of NAR Treasurer Bill Armstrong
Bill Armstrong, NAR Treasurer

The latest podcast on NAR Commercial Real Estate issues from Treasurer Bill Armstrong covers:

Market Improvement

The Commercial Real Estate 2Q Market Suvey shows market is stable and even improving in some areas of country.  The survey provides an overview of market performance, sales and rental transactions.

Top Obstacle: Lending VS. Recovery

REALTOR®s define financing as the biggest obstacle in the marketplace now, followed closely by pricing.  Despite these challenges, 7 in 10 commercial REALTORS® clsoed sales transactions during the second quarter.   Sales volume grew 12% from a year ago and leasing activity is up 4% from pervious quarter.
This dovetals with May’s CRE Lending Survey; 75% mentioned lending standards are as stringent as or more stringent than a year ago.  Adding to tight underwriting, down payment conditions also require hefty commitment; 72% of closed sales required a down payment above 20% to secure financing.

NAR Advocacy For Commercial Is Ongoing: FASB, Basel III, EB-5 Visas

Bill mentioned NAR is advocating for better lease accounting rules that will enable increased borrowing. NAR’s efforts have resulted in the FASB and IASB reexamining the potential economic outcomes of their proposed rule that would force many companies to capitalize commercial leases on to their balance sheets.

This month, NAR regulators to study potential impact on real estate of international capital and liquidity requirements for banks known as Basel III that require them to hold more capital back rather than making it available to lend.  While their goals are commendable, said Armstrong,  NAR supports efforts to ensure that Basel III foes not reduce liquidity.

This month, NAR joined a broader coalition of  of real estate organizations asking Congress to support legislation that would re-authorize the EB-5 Visa.  This provides visas to individuals overseas who invest in commercial enterprises and ceate jobs in targeted areas across the us.

NAR continues to push for legislation to increase liquidity in other ways. including raising the lending cap on credit unions.  Also by creating a covered bond market and supporting the extension of the SBA’s commercial refi loan program, set to expire on September 27.

NAR Code Of Ethics Training Due December 31st; Centennial of COE in ’13

Bill reminded us to not forget that 2012 is also the year to complete NAR Code Of Ethics training, which comes up every four years.  You have until December 31st to complete it. NAR’s COE is one of the things that truly sets REALTORS® apart from other real estate licesnsees.   Asked Bill: “How many of you have done your training? I have and it’s pretty painless.” You can do the training thru your local association or online at realtor.org.

2013 also marks Centennial of NAR’s Code Of Ethics. The celebration of the centennial will kick off at the NAR Annual Conference and Expo, Nov 9-12 in Orlando. The celebration will continue  through 2013.

Photo credit: MackintoshRealtors.Com

 

Getting To The Bottom Of The Proposed Lease Accounting Rules Changes

Illustration of new lease accounting

As we’ve written about before, recent proposed changes to accounting standards would have enormous impact on commercial real estate leases.  NAR has been on the forefront of calls to ensure proposals do not adversely impact our industry.

What might not be clear is that these changes impact not only commercial real estate, but all commercial leasing in general.  That means that our industry is one of a set of industries that do business using leases and for whom these accounting standards changes would bring major changes to business and markets.

While reading up on the impacts to commercial real estate first and foremost will get you caught up on the impacts to our industry, you don’t need to stop there.  The Federal Accounting Standards Board, FASB,  the body who is undertaking the proposal to make the accounting changes, has made public over 800 comment letters from around the world on the matter of lease accounting standards changes.

The renting of everything from trucks to planes to equipment, the markets for life insurance, the use of service contracts are all potentially touched by these proposed standards changes.  With over 800 letters to choose from, FASB has done us a valuable service in collecting in one spot so many voices from the business communities that depend on leases and their accounting rules. Reading through the comment letters shows in how many ways these accounting rules changes, if adopted, can wreak havoc on a wide set of industries and produce negative consequences far beyond the ills the changes are meant to address.