The Financial Accounting Standards Board Ready to Change Rules

[Account Closed]

Time to keep a look out and be mindful of the following article written by the ICSC (International Council of Shopping Centers)

ICSC is trying to ensure that accounting rules governing the way retailers report their lease obligations to investors do not get rewritten in ways that could harm the shopping center industry.

The Financial Accounting Standards Board, which sets U.S. accounting rules, and its international peer, the International Accounting Standards Board, are ready to change those rules. The current U.S. leasing standards, established in 1976, allow companies to report many leases as operating leases without including them on balance sheets. This method fails to apprise investors of the true financial commitments represented by the leases, critics say. In a June 2005 report to Congress, the Securities and Exchange Commission estimated that current rules allow companies to keep about $1.25 trillion in future cash obligations off-balance-sheet. The SEC asked the FASB to require that both landlords and tenants report their economic interest in leased assets, in addition to assets and liabilities related to the lease payments.

ICSC is asking the agencies to exclude shopping center leases and handle them separately. The association is also asking that certain short-term leases be excluded from the standard, such as those that have terms of a year or less and that do not have a material effect on financial statements.

“On the landlord side, boards are proposing to treat every lease following one of two alternatives: a usage model and a financing model,†said Joe Sebik, a lease-accounting specialist and an accounting adviser to ICSC. “Under the usage model, they [are] proposing that the present value of rents be recorded as a lease receivable — either a liability or a deferred revenue — separate and apart from the actual real estate. The capitalized leases would be in addition to the real estate already recorded.â€

If these rules are instituted, the results would not reflect the true economic model of a tenant-landlord relationship, Sebik says. “It would also potentially be double-counting the same value,†he said. “With the financing model, every lease would be treated as if [the landlord] sold the rights to use that portion of the mall, and the only income recognized would be financing income. The problem is, there’s no relationship to the true tenant-landlord relationship. Individual stores don’t have residual values per se. So ICSC is recommending that things essentially be kept the way they are, [where leased space] is treated as an operating lease of the mall, which is investment property.â€

The accounting agencies are expected to issue a preliminary standard next year and the final rule the year after, followed by implementation in 2013.