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News Release

London

Lease Accounting Changes: Huge Potential Financial Impact on Corporates

Jones Lang LaSalle Issue Perspectives on Operating Leases White Paper



London, 7th May 2009 – Today Jones Lang LaSalle Corporate Finance has highlighted the potential far reaching impact on occupiers of dramatic proposed changes in lease accounting, in a new white paper Perspectives on Operating Leases. Under these proposals operating leases as they currently stand will be eliminated and all leases will be capitalised on balance sheet. No leases will be spared, including leases signed before a change in standard. Based on the proposed accounting changes, Jones Lang LaSalle estimates that the debt loads of a quarter of FTSE all share companies will more than double.

The new rules will mean that all property leases will be on balance sheet; the ‘right to use’ a property for a period of time, under a lease, will be considered the asset and the rental commitments considered the liability. For accounting purposes the rental payments will be split between capital and interest (like a loan) so the cost in the profit and loss account will be higher in the earlier years of a lease.

Michael Evans, Director, Jones Lang LaSalle Corporate Finance said: “If these proposals are adopted, they will change the way corporations view their property holdings.

They will inflate both assets and liabilities, affect profit-and-loss run rates, impact key performance measures including debt covenant ratios and change the overall make-up of corporates’ financial statements.”

He continued: “The entire ‘own versus lease’ decision will become more commercially driven and less focused on accounting, because the property will be recognised on the balance sheet, whether it is owned or leased. We might start to see corporate occupiers considering ‘buying in’ their leased property – if they have the cash to do so.”

Michael Evans concluded: “If these changes come into force they will have a negative impact on corporates because of the impact on their profits. It will also create a considerable additional administrative burden for companies. However, it should be good news for investors and analysts because there will be greater disclosure in the financial statements.”
                                
                                                        
Notes to Editors
The International Accounting Standards Board (IASB) and its US counterpart The Financial Accounting Standards Board (FASB) jointly issued a discussion paper in March 2009 outlining dramatic proposed changes in lease accounting. A final standard is expected to be issued in 2011 with a possible effective date of 2012 or 2013. Public comment on the discussion paper is invited by July 2009.

Click here to download a copy of Jones Lang LaSalle Corporate Finance’s White Paper entitled Perspectives on Operating Leases