The revised lease accounting proposals: Aesop's Fables revisited

Abstract

A close study of the newly proposed lease accounting changes from the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) brings to mind the lessons in many of Aesop's best-known fables. While the FASB and IASB's recently issued Revised Exposure Draft documents on lease accounting contain many significant changes from their original proposals in August 2010, these new proposals will require CRE executives and their counterparts in finance significantly to change the way in which they analyse, negotiate and structure leases going forward in order to avoid learning — or remembering — many of those lessons the hard way. For example, assuming two different leases with identical gross cash flows will have an identical impact on the tenant's balance sheet and income statement may result in the tenant wishing it had looked before it leapt. Understanding the full financial statement impact from any lease helps illustrate how changes in the structure and negotiation of that lease may likewise change its financial statement impact, for better or for worse. Moreover, the subjective nature of many elements of these newest proposals increases the need for CRE and finance executives to be able to deal objectively and consistently with those elements in order to avoid unintended financial consequences. While the FASB and IASB have clearly attempted to assuage the concerns many raised about their original proposals from 2010, some criticisms of these revised lease accounting proposals remain, though a more thoughtful analysis shows that many of them appear exaggerated. Those concerns notwithstanding, the combination of significant and varying financial statement impacts, numerous subjective issues and, in many cases, incomplete data on existing leases means the worlds of CRE and finance will need to begin working more closely together than they have in the past. In fact, many will find they should have already begun doing so in order to be prepared to transition to these new standards in time.