Recently, the Financial Accounting Standards Board (FASB) updated their standards effectively changing the way companies must list their lease on their balance sheet. This will undoubtedly have rippling effects on businesses, and the leasing process as a whole. The update has the potential to alter the landscape of the commercial real estate lease.
What’s New?
The FASB updates aim to maintain consistency among accounting practices. The update will make businesses account for the entire value of a lease in year one. While it is purely an effect on paper, bankers, lenders and investors will need to understand the changes that will show up on a company’s ledger. The impact will be felt the most by large businesses, however small- to mid-sized businesses will still be affected. The updates will be implemented as of December, 15 2019 for publicly held companies, and Dec. 15 2020 for privately held companies. While this may seem far down the road, preparations to compensate for the potential change in your business’ ledger should start now.
The Impact
Commercial real estate leases need to be negotiated with the new changes in mind, as the new standard will inflate the debts of a company during the first year of the lease. This could impact compliance with current loans, affect future loan approvals and potentially mislead investors. The mandatory listing of a full lease as a liability will be a challenge for accounting teams of larger corporations who strive to maintain consistent earnings. The new standards may throw a company’s books out of balance, and this will be a major factor to consider when negotiating a lease.
The Advantage of a Professional
A professional broker who is trained in understanding the new FASB regulations will be most effective at negotiating optimal lease terms to minimize the impact on your balance sheet. This will include new ways to structure the base rental rate, timing of rent increases, separating out operating expenses and focusing on expansion rights rather than lease renewals that would leave a larger mark on your financial ledger. The ever-changing policies and guidelines are an important reminder to seek the assistance of a professional broker, such as the ones at Tenant Advisory Group. We work closely with our clients to advise them of the best way to proceed in signing a lease while keeping in mind the various impacts of the new FASB guidelines.
