The updated Financial Account Standards Board (FASB) Lease Accounting Standards will be finalized by the end of the summer.
These changes will radically transform lease accounting, with significant consequences to a company’s financial results, according to Avison Young.
Under the updated rules, for example, operating leases are pretty much dead, the firm reports, and virtually all leases will be recognized on a firm’s balance sheet. What’s more, the traditional method of using the discounted cash flow to analyze lease deals will no longer be enough because two leases with identical cash flows can have significantly different impacts on both the balance sheet and income statement.
We caught up with Michael Vullis, principal with Avison Young who oversees the Florida region’s 12 million-square-foot property management portfolio, for his insights. He told us property management has recently shifted dramatically from the “commoditized fixer-upper” or “rent collector” to a valuable extension of the asset manager.
“As we wrap up 2015 and look beyond, this can be seen in the crucial role of property management in the potential impact of the proposed Financial Accounting Standards Board changes in lease structure and reporting,” Vullis says. “While the exact details of the proposed lease accounting standard will be subject to ongoing refinement, there are many things that real estate lessees and lessors can, and should, be doing today with respect to their lease structures, business operations and financial reporting processes.”
Avison says the impact on CFOs and others who make financial decisions is immediate. Financial teams need to see and understand the financial statement impact on all leases and for competing transaction options if they are negotiating a lease, according to the firm’s analysis.
“Property management should immediately conduct a strategic evaluation of the existing lease portfolio, starting with the largest leases, to be able to properly assess how the leases will be accounted for under the new rules,” Vullis sys. “From this, the team can measure the impact on EBITDA and other key financial ratios and evaluate whether there is any potential impact on loan covenants.”