A Fresh Take on CRE

FASB Update - Lease Accounting Changes Are Coming

I thought it would be interesting to share this note from the Grubb & Ellis Corporate Finance team on the FASB accounting rule changes.

Here it is:

A joint meeting of the International Accounting Standards Board (IASB) and the Financial
Accounting Standards board (FASB) was held Wednesday, February 16th, that produced a major
reversal from the Lease Accounting Exposure Draft (ED) issued last August. One of the most
controversial - and most commented upon - aspects of the ED was the provision that would
capitalize net rent associated with renewals. The intent of language in the ED was to capture the
“most likely term of occupancy” that would include assessment of both the base contract term
and renewals.

While the Boards are still grappling with the exact terminology, it appears now that lease
renewals will only be capitalized if there is a clear economic incentive to do so on the part of the
lessee. For example, renewals at a bargain rate would still be capitalized. This may force a lessee
to choose between a heavier balance sheet presentation and better lease economics.

Another onerous component of the ED was also scrapped on Tuesday – the regular reassessment
of the likely outcome at each reporting date. Only significant changes in the lessee and/or its
business will require reassessment of the lease.

On one hand, these changes to the ED should simplify both the initial implementation of the new
standard as well as the ongoing compliance. However, it means that a rules-based methodology
will remain, and could have a material impact on how some companies approach leasing.
Companies that make decisions that are heavily influenced by GAAP will have a bias toward
shorter lease terms in order to minimize the impact of the new standard as now defined. This is
striking in that it works against FASB’s objectives of moving to a principles-based approach to
reduce the opportunity to manipulate the impact of leases on the balance sheet.

CAUTION – FASB and IASB still have to agree on final wording and guidance, making this a work inprogress. Stay tuned!

For more information contact:
Jeffrey W. Shell
Executive Vice President, Corporate Finance
Institutional Capital Markets
Grubb & Ellis Company
313.417.2100 | jeffrey.shell@grubb-ellis.com

Amie D. Sweeney, CPA
Senior Financial Analyst, Corporate Finance
Institutional Capital Markets
Grubb & Ellis Company
313.417.2100 | amie.sweeney@grubb-ellis.com