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News Release

London

Jones Lang LaSalle Offers Fresh Perspective on Global Lease Accounting Review


London, 21st October 2010 Jones Lang LaSalle has published a paper addressing the global lease accounting rule changes announced by the International Accounting Standards Board (IASB) and its counterpart, the US Financial Accounting Standards Board (FASB) in August 2010.
 
Michael Evans, Director in Jones Lang LaSalle’s Corporate Capital Markets team, said: “Most corporate real estate executives are aware of the new model for lease accounting and its impact on the balance sheet.  The reality of the proposal is now shifting the focus to potential changes in leasing strategy and practices as well as meeting requirements for future administration of leases.”
 
He continued: “Pressure to revamp the three-decade-old leasing standard is driven by the perceived lack of transparency around off-balance sheet obligations and the complexity of current lease accounting.  Today, enterprises choose between two methods for classifying leases - as operating or finance leases.  Under the new approach, organisations will recognise a liability for obligations to pay rent and a corresponding asset representing the right to use the underlying leased property.”
 
Richard Porter, Director in Jones Lang LaSalle’s Corporate Capital Markets team, added: “A major question is how companies will react and how significantly they will alter the use of leases and desired lease terms.  A knee-jerk response may be for companies to seek shorter term leases or favour ownership if property use goes on the balance sheet anyway.  Certainly, the changes will push companies to articulate and validate the reasons for leasing such as flexibility in occupancy and preservation of capital for core business activities.”
 
According to Jones Lang LaSalle’s paper, the new standard will disproportionately affect certain business sectors such as retail and commercial banking, with a heavy reliance on real estate to generate revenue.  The immediate demands will be to:
  • Assess the suitability of existing lease administration and reporting systems to accommodate the new accounting requirements.
  • Plan for enhancement of lease abstracts and processes for additional data capture for existing leases.
  • Create standards for assessment of obligations for lease term, new lease expense and contingent rent that will survive audit review.

Dr Lee Elliott, Head of Occupier Research at Jones Lang LaSalle, concluded: “These sweeping changes in lease accounting will give CRE executives a valuable opportunity to review the fundamental business reasons for leasing and to clarify when financial reporting objectives are merely a subsidiary issue.  Understanding the need for operating flexibility and preservation of capital for core business investment will help organisations navigate through the undoubtedly challenging time ahead with new lease accounting.”

A final draft of the lease accounting standard is expected to be issued mid-2011 with an effective date yet to be determined but likely to be no sooner than January 1 2013.