It looks like most companies are not ready for the new lease accounting standards expected to be finalized as early as mid-year.
According to a recent Deloitte survey, just 7 percent of executives believe their companies are extremely or very prepared to comply with the new lease accounting standards proposed by the Financial Accounting Standards Board (FASB).
This is even more worrisome given that a large number of companies believe the new rules will have a big impact on them.
For example, more than 80 percent of 284 individuals who participated in the survey concede that the lease accounting standards will place a significant burden on financial reporting for tenants as well as property owners. In addition, more than 40 percent believe the new standards would make it more difficult to obtain financing.
Also, 68 percent of respondents said it would have a material impact on their debt to equity ratio while about 40 percent thought the new lease standard would lead to shorter term leases.
"These changes will have an immense impact on many companies that lease commercial property," said Josh Leonard, a leader in Deloitte's real estate consulting practice. "Beyond the major changes involved, companies need to start looking at their lease portfolios now for adequate lease information, technology capabilities, and resources to implement and monitor the new standard, expected to be final by mid-year 2011."
The new proposed draft standards were distributed in August 2010. Deloitte stresses that under the anticipated new rules, lessees--and possibly lessors--would have to significantly revamp how they account for real estate and equipment leasing transactions, providing more extensive financial statement disclosures than ever before.
It points out that the new standard would effectively eliminate all operating leases and require them to be capitalized on the company's balance sheet. Lessees would need to replace rent payment expense reporting with interest and amortization expense reporting.
One problem companies are facing is internal. Only 35 percent of respondents are extremely or very confident in the integrity of their company's lease data needed to comply with the new standard.
They are also mindful they would need major IT investments. For example, 25 percent of the respondents said their companies are likely to have to make a major upgrade to their information technology systems, while 20 percent said they are likely to acquire a new system.
Among companies with 1,000 or more leases, the need for IT investment was even greater - 39 percent of these respondents expect the new standards will lead to a major technology system upgrade, while 27 percent expect to acquire a new system. In addition, just 21 percent of respondents are extremely or very confident in the capability of their companies' information technology provider to comply.
"For the real estate industry, the impact of the proposed new lease accounting changes will impact both the balance sheet and tenant strategy and execution," said Bob O'Brien, vice chairman and real estate services leader for Deloitte LLP. "For owners and operators, the big shift will be in what their tenants demand. Shorter term leases may be in high demand along with an increased tenant appetite to forego renting in favor of buying."