Tenant Intelligence

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Chris On November - 18 - 2017

New Lease Accounting Rules

The new lease accounting rules will fundamentally change the way leases are recognized on a company’s financial statements.

For companies that report under International Financial Reporting Standards (i.e. non U.S. companies), the new rules apply for 2019.  For U.S. companies, the introduction of the new U.S. GAAP rules is being phased in with public companies adopting in 2019 and private organizations in 2020.

These new rules will impact all future leasing decisions such as acquisitions, renewals and re-gears, so it is important that everyone is aware of these changes.

Balance Sheet Changes

In the future, all leases will appear ‘on-Balance Sheet’ as an Asset and Liability.  On implementation, Balance Sheets will balloon and companies will appear to have a greater asset base with higher levels of debt.

Profit & Loss Changes

For U.S. Companies, companies will need to classify their leases as a Finance Lease or an Operating Lease.  Under the new U.S. GAAP standard, the existing Finance Lease/Operating Lease treatment for the P&L has been retained.  As the majority of real estate leases will be classified as ‘Operating Leases’ under the new U.S. GAAP standard, the Profit & Loss will continue to be the same as the rent paid.

For non U.S. companies, the Profit and Loss will no longer equal the rent paid under the lease. Instead, lease payments will be split into Amortization and Interest.  The P&L will be higher than rent at the start of the lease.  The P&L will reduce over the course of the lease term due to the lower interest charge. Companies will be seeking to minimize the P&L spike at the start of the lease wherever possible by seeking shorter, more flexible lease terms.

Lease Accounting Calculator

To help you navigate these changes, Cushman & Wakefield has just launched an interactive and easy-to-use Lease Accounting calculator.  It is designed to illustrate the impact of leasing decisions under both of the new accounting standards.  The Lease accounting calculator is a user-friendly tool that will enable you to input the key terms of a lease and calculate the financial impacts under the new rules.

The Lease Accounting calculator is available online as part of Cushman & Wakefield’s award winning Global Occupier Metrics website.

If you have more questions on this topic, give me a call and I would be glad to come in and discuss further.  

Categories: Tenant Intelligence

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