Are You Ready to Fair Value Your Lease Obligation?
Banks, lessees and lessors should be aware of the huge changes on the horizon that could dramtically change the terms of leases, loan covenants and the overall financial statement presentation. With the ongoing push to converge U.S. generally accepted accounting principles (GAAP) with International Financial Reporting Standards (IFRS), there are sure to be changes in long-standing GAAP principles. One of the most debated and contested changes on the horizon is the treatment of accounting for leases. Under current U.S. GAAP, operating leases such as building and equipment leases, are treated as an expense for the lessee (or revenue for lessor) over the term of the lease. Modifications of principles related to accounting for leases will drastically change the current method. These changes are expected to be enacted in 2013. All of the details have yet to be ironed out, however this article “New Accounting Rules Ruffle the Leasing Market”, published in the New York Times on June 22, 2010 provides a detailed overview of the expected changes. One interesting side effect noted on the New York Times article was that “this may cause more companies to buy their offices and drive down demand for lease space.”
