New lease accounting standards are evolving: Is there a scary monster under the bed and will it really affect lease versus buy or other CRE decisions?

The new lease accounting standards will change some business practices, but not the ones most have previously imagined. Why? What has changed? Very recently, the accounting boards (FASB and IASB) made significant changes to the proposals they originally released in August 2010. These changes served to alter the impact the original proposals were expected to have on CRE business practices and strategy. Thankfully, both for CRE and its counterparts in corporate finance, the changes adopted over just the past few months mean some of the most controversial aspects of the new lease accounting standards have been moderated so that they will not have as material an impact as originally envisioned. While all leases will still be capitalised with a front-loaded impact on the tenant's profit and loss, the revisions to how renewal options and contingent rents are to be accounted for, among other important changes, result in a smaller impact on the corporate balance sheet and income statement — provided CRE professionals understand the newly revised proposals. Importantly, the revised proposals mean CRE's lease versus buy decisions should not be impacted, but other business practices will be affected. So while the new lease accounting standards represent a monster hiding under CRE's bed, this paper explains why the monster is not as scary as most originally envisioned.