Lease accounting may see changes

Jul 1 2009 By Malcolm Brown, The Journal

Significant changes are proposed regarding lease accounting that could have a material impact for corporate occupiers says Malcolm Brown of BNP Paribas Real Estate, Newcastle.

THE International Accounting Standards Board (IASB) is presently seeking comments on its discussion paper issued earlier this year that recommended putting all leases on-balance sheet, rather than just leases currently classified as finance leases

For analysts and investors the proposals are likely to be welcomed, but for occupiers of property leases, particularly those with large leasehold estates and with long average lease lengths the proposals are not so welcome.

The current position means occupiers of leasehold property are required to classify leases between operating leases and finance leases.

A finance lease exists where the risks and rewards of ownership have effectively transferred from the landlord to the tenant. Such leases are generally disliked by occupiers of leasehold property as they effectively bring the lease "on-balance sheet" and create an asset and a corresponding liability on the balance sheet.

However an operating lease does not show up on the balance sheet and the rental payments go through the profit and loss on a straight line basis.

Assuming the IASB proposals go ahead in the current form there will be a period of readjustment where the liabilities of many corporates will appear to increase significantly along with the corresponding assets.

The impact on corporate decision-making behaviour could be significant, particularly when it comes to a decision between holding freeholds versus leaseholds.

In general it promises to add a level of complexity to the process of preparing accounts. So to be prepared take the potential changes into account generally when developing and refreshing property strategies.

Malcolm Brown, senior director, lease advisory, at BNP Paribas Real Estate, Newcastle.