New lease accounting standards have arrived. Are you complying?

Early in 2016, the Financial Accounting Standards Board (FASB) and the International Accounting Standard Board (IASB) both released new lease accounting standards – FASB Topic 842 and IFRS 16. The standards went into effect for fiscal years beginning after December 15, 2018.

Under these changes, virtually all leases are put onto the balance sheet and, for those companies that report under IFRS, the P&L treatment for real estate leases has dramatically changed.

The changes are intended to eliminate one of the largest sources of off-balance sheet financing and improve comparability and financial transparency.

Who is impacted?

The lease accounting standards impact all companies that have leases, including real estate and equipment, and report under FASB or IFRS. This includes public companies, private entities, and non-profit organizations. The changes dramatically increase the liabilities reported, and for those companies that rely heavily on leasing for operations such as retailers, restaurant chains, healthcare providers, banks, and airlines, there are significant implications. In addition to impacting a company’s balance sheet and potentially their income statement, key financial ratios such as the debt-to-equity and return on assets are affected.

The impact is significant for real estate occupiers.

Virtually, all leases need to go onto the balance sheet:

• Lessees recognize a Right-of-Use Asset (ROU) and Lease Liability.
• Under U.S. GAAP, there is no straight-line guidance for determining a Finance lease vs. an Operating lease. This increases the level of judgement for Lease Classification.
• Under IFRS, there are no longer Operating leases and straight-line rent. All leases are Finance leases with a front-end loaded P&L impact, resulting in depressed profits.
• Under U.S. GAAP, real estate Operating leases still exist with straight-line rent. Equipment leases are now Finance leases, with a front-end loaded P&L impact.
• It’s a significant administrative burden for companies to collect the data and calculate the impact for financial reporting.

Lease vs. own decisions

In the wake of lease accounting changes, large corporations are re-examining the criteria for deciding whether to lease or own property. The new standards cause balance sheets to grow for most companies, and the changes cut some of the financial benefits of leasing.

Of course, decisions to own or lease properties are based on many more variables than accounting rules alone. Economics, portfolio flexibility, and operational requirements are still the primary drivers for a lease vs. own decision.

However, the changes have potentially shifted the balance toward ownership.

How JLL can help

The intricacies of the revised lease accounting standards can be overwhelming. JLL can help you better understand the changes, implement programs to ensure you follow the new standards, and reformulate your leasing strategies.