CCIM Urges FASB to Assess Economic Impacts of Proposed Accounting Changes

CCIM Institute supports letter from congressional leaders requesting economic analysis.

In the weeks following the CCIM Institute and Institute of Real Estate Management’s 2012 Capitol Hill Visit in April, 61 members of congress have signed on to a bipartisan coalition letter asking the Federal Accounting Standards Board to conduct a comprehensive economic impact study that assesses the potential effects of the proposed lease accounting changes.

In addition to the bipartisan letter, the organizations have urged U.S. representatives to sign on to and co-sponsor H.R. 2308, the SEC Regulatory Accountability Act, which was introduced by Rep. Scott Garrett (R-NJ). As proposed, this legislation would also help to clarify the impacts of the lease accounting changes by requiring the Securities and Exchange Commission to assess the economic consequences and adopt the regulations only if the benefits justify the costs. Several members of Congress have shown interest in and support for this legislation as well.

In 2010, FASB and the International Accounting Standard Board proposed new lease accounting rule changes that, if implemented, could have adverse economic consequences for U.S. businesses and the overall commercial real estate industry. Under the proposal, U.S. companies that lease office, industrial, and retail space would be required to capitalize the costs of that lease – similar to if they had purchased the property – instead of recognizing the true costs of the lease transaction. For businesses leasing space, particularly small businesses, this legislation would make real estate leases a major liability, potentially resulting in shorter lease terms to minimize the impact, instability in future rental costs, and uncertainty about availability of space. Proposed changes may also jeopardize income property fundamentals, loan structures, property valuations, financing covenants, and the underlying economics of commercial real estate.

Since 2010, CCIM and IREM have submitted several comment letters to FASB and IASB asking to delay any final decisions and collect more information about the substantial problems the proposed lease accounting changes may have on the private sector. As a result of these letters and other actions, FASB and IASB have delayed their initial implementation timeline. In addition, a coalition of non-profit and commercial organizations including the National Association of Realtors funded a research project to determine the economic impact of the proposed FASB and IASB changes to real estate operating leases.

Responding to an outpouring of stakeholder concerns, FASB and IASB agreed to exempt some commercial property owners from the new requirements, stating that lessors would be allowed to measure their investment properties at fair value. Unfortunately, commercial property tenants (lessees) would still be required to capitalize real estate leases onto their balance sheets. FASB and IASB will likely reintroduce their lease proposal in mid-2012, with a 120-day comment period to follow. While the potential exists for significant changes to the current lease proposal, the two accounting boards remain split on alternative methods for lessee accounting for inclusion in a new proposal. Both organizations are not expected to finalize the rules until mid-2013, with the likely transition date pushing into 2016.

Learn more about CCIM Institute’s position on FASB’s proposed lease accounting changes.

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