Lease accounting with the Gershwin Brothers and The Rolling Stones: Part 1

The long awaited, and greatly debated, changes to lease accounting standards under GAAP and IFRS were finalised in early 2016. As corporate real estate executives, their advisers and their peers in corporate finance have now begun the first steps toward implementing these new standards, many are surprised by the financial statement outcomes. More specifically, due to the very subjective nature of many aspects of the new standards, companies are finding — and will increasingly find — two identical leases can have widely divergent accounting outcomes when accounted for by two different companies. This is true not only for a scenario where one company reports under GAAP and another under IFRS, but also for two different firms both of whom report under the same accounting standard. Despite the fact that the FASB’s and IASB’s stated intentions more than seven years ago were to achieve consistency and transparency in lease accounting, this paper discusses why companies should not expect either outcome. In Part 1, we explain how two identical leases can realistically yield very different accounting outcomes, and why it matters from a balance sheet, shareholder equity, net income and EBITDA perspective. The forthcoming Part 2 of this paper will focus on steps CRE directors, their advisers and counterparts in finance can take to optimise various financial impacts in light of the new standards.