Did you know that FASB (financial accounting standards board) and its international equivalent (IASB), are considering major changes to the way corporations record operating leases on their books? If the proposed modifications are codified, all corporations will be forced to move real estate (and equipment) leases from “off balance sheet” on to their balance sheets. This has huge implications on the profitability, and hence the growth potential, for every public and private company that currently occupies their real estate using leases.
It is estimated that if all corporations are required to capitalize their leases, the sum total could be well in excess of $1.3 Trillion (a 2005 figure) and of that amount nearly $1 Trillion would be real estate leases.
It has been suggested that the changes are intended to improve the transparency, credibility and usefulness of lease accounting. Like with most things there is undoubtedly some truth in this reasoning, but I have my own theory as to what is may be driving the change…………a potential for increased tax revenue.
Currently an operating lease is 100% deductible against corporate earnings. If instead, the lease is moved on to the balance sheet and a portion of it is viewed as an asset it would be fair to assume that it increases the potential tax obligation of the corporation (or private owner).
Regardless of the ultimate motivation of those behind this proposed change, it is important that commercial real estate advisors make sure that their clients are fully aware of this development, and if possible, take the opportunity to weigh in on the subject while FASB (and IASB) are still considering the changes.