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US survey reveals impacts of lease accounting proposals

  • United States (old) Image

18 Feb 2011

A United States survey has been released, assessing the potential impact of the proposed revisions to lease accounting.

The online survey was conducted for Deloitte by Bayer Consulting from December 1, 2010 to January 3, 2011. The survey involved 284 executives and assessed the potential impacts on company accounting and the broader real estate market. Respondents represented a wide range of industries including real estate (33%), retail (20%), financial services (10%), manufacturing (8%), professional services (6%), and technology, telecommunications and media (6%).

Some of the key findings from the survey are outlined below:

Major impacts expected

  • The proposed changes could have a major impact on the financial statements of lessees and on the real estate market for rental property
  • When asked about the likely affect of the new lease accounting standards, many respondents expected significant impacts including:
    • Impact debt to equity ratios (68%)
    • Affect existing debt covenants (44%)
    • Make it more difficult to obtain financing (40%)
    • Lead towards shorter-term leases (40%)
    • Encourage lessees to purchase rather than lease their space (25%)
  • If standards lead lessees to seek leases with shorter terms, respondents believed lessors may try to increase rents to recoup their investments on tenant improvements and other rent concessions

Implementation

  • Implementation will be a major undertaking, especially at companies with large lease portfolios
  • More than 90% of respondents said their companies were not well prepared to implement the new lease accounting standards.
  • In addition, challenges are expected in lease data gathering, upgrades to technology systems, integrity of lease data and income tax effects

Investment properties

  • Lessors did not support applying the new standards to investment property – 75% favored fair value accounting versus the proposed new standard.

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