Jones Lang LaSalle highlights the impact of proposed lease accounting standards on the Asia-Pacific business sector  Global real estate advisory firm Jones Lang LaSalle (JLL) is urging businesses across Asia-Pacific to prepare for dramatic proposed changes to global lease accounting standards with significant impacts predicted on real estate portfolios in the first year of the new regime.The International Accounting Standards Board (IASB), together with the US Financial Accounting Standards Board (FASB), has recommended sweeping changes to the accounting of operating leases.
The exposure draft has already been released this month, with final comments to be submitted by December 15, 2010. However, the final guidelines are not due for release until the second half of 2011.
David Brown, head of lease administration (Asia-Pacific) for JLL, indicates that the accounting changes will be applicable for any business that leases assets, including real estate and equipment.
“The changes have been driven by a recognised need for greater transparency in leasing standards by taking off-balance sheet obligations and presenting leases front and centre on company balance sheets. This new system demands a stronger long-term view of leases, factoring in future options, based on the balance of probabilities, and in doing so, generating considerable administrative burden,” adds Mr Brown.
More on the new system
Under the new system, rent expenses are expected to be replaced by diminishing leased assets on a straight line basis with higher front-end interest expenses.
“Rent represents one of the largest operating expenses for businesses. So, the most substantial hit to businesses’ profit and loss statements will be in the first year of the rollout as companies report as much as 20% higher initial occupancy expenses for a 10-year lease,” opines Sylvia Koh, head of corporate consulting (Asia-Pacific) at JLL.
Companies will be required to capitalise all lease obligations on their balance sheets, thereby recognising their right to use the leased property as an asset and their obligation to pay rent and other amounts as liability.
In this regard, Ms Koh says that companies will therefore require much more information related to property leases than earlier and should be prepared to make robust future projections to accurately report their assets and liabilities for each reporting cycle.
The changes will potentially affect all current and future leases for both real estate and equipment, consequently elevating the importance of real estate strategies capable of supporting the financial resilience of any business.
Although the proposed changes are likely to be effective in 2013, it is better to start preparing from now for the same, feels Mr Brown. He even outlines some suggestions for businesses that draw heavily on lease arrangements:
According to the advisory firm, commercial banks with large branch systems and retailers that typically lease the vast majority of their locations are the key players set to face the greatest impact.
However, organisations reporting under either the International Financial Reporting Standards (IFRS) or US GAAP including all US-based companies, most European Union and Asia-Pacific-based companies, any company based in Australia, Hong Kong, India, Japan or Korea where conformity to IFRS is or will be followed are likely to be impacted when the proposed changes become effective.
Jeeta Bandopadhyay |
