Eight years since it was first floated, the International Accounting Standards Board (IASB) has announced that it will issue its definitive guide to the new lease accounting standards by the end of 2015.
The new standard has been in the pipeline long enough for many organisations to forget about its implications. And that’s no surprise. First proposed in 2007 it’s become something of an industry hot potato, subject to seemingly endless debate.
But the debate is over and come 2019, all companies reporting under IASB will need to comply.
We expect the US accounting standards board FASB to be issuing their own lease standard in Q1 2016 and although there is agreement between the Boards on a number of issues, there is a massive divergence on the income statement treatment of new leases – so there will be two different standards.
Commenting on the new standard, Michael Evans, Director in JLL’s Corporate Capital Markets team said: “For real estate occupiers under IASB the impact is potentially huge: leases will become a key feature on company balance sheets.”
So what does this mean in practice? Given the decisions made by the IASB to date, we know:
- All leases will come on to balance sheets, effectively inflating assets and liabilities
- The income statement treatment of a lease will be different to the actual cash rent being paid
- The income statement impact in the early years of any lease will be higher than currently – depressing profits
- It will be a significant administrative burden for companies to collect the data and calculate the impact
The Occupier impact
In theory we should see occupiers seeking:
- Shorter term leases – to reduce the balance sheet and profit impact on their financial statement
- More turnover rents – to the extent the rent is uncertain then it will not need to be recognised on balance sheet so rents that are a percentage of turnover could be very attractive to retailers
- A move towards ownership of property – given there is no off balance sheet advantage of leasing
Commenting on the potential impact, Michael Evans added: “Given long-established funding and investment structures we are unlikely to see changes overnight. Many companies may take the view that their cash position doesn’t change. Private companies, for example, who do not have the pressure of shareholders or analysts to contend with, may be indifferent to the changes.”
But JLL advises most companies to begin to take action by:
- Analysing the impact of their leased property portfolio on their financial statements
- Evaluating alternative strategies to reshape their portfolio
- Identifying how they are going to collect the information and prepare for implementation
The Investor impact
The most forward thinking investors may change their approach to try and capitalise on the changes and create leasing deals that are more appealing under the new standard.
We may potentially see:
- A growth in serviced offices and co-working – not only does it create greater flexibility but its initial balance sheet impact is limited
- An end to rents with fixed uplifts – they represent the worst of all worlds under the new standard
- The development of a suite of sale and leaseback offers including strip income, ground rent and turnover rent products – since leases are all on balance sheet, a range of structures may be developed to meet occupiers’ objectives
Some sectors will be specifically impacted, retail being one, where we may see:
- A proliferation of turnover rents – as well as a range of different structures – we may see lease regearing to turnover rents, as well as new transactions structured on this basis
- A strategic review of store portfolio performance versus lease costs and an evaluation of the right portfolio profile for the future
- A surge in surplus leases – particularly where the existing stores are currently marginal
Although these changes pose something of a threat – to retailers and the service sector in particular – behind the threat of administrative overhauls lies an opportunity.
Michael Evans, concluded: “For anyone involved in the business of buying, selling or leasing real estate, this change signals a new world of asset management and will force strategic reviews of portfolios across the board with almost every occupier asking: should I own or should I rent?”