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.