The days of operating leases (off balance sheet) versus finance leases (on balance sheet) may be coming to and end with the proposed changed in the International Accounting Standards. Under the new standards all leases will need to be accounted for on balance sheet.
Whilst the cash position of the organisation won’t change – rent will still be paid at the agreed rate – it will be accounted for differently. There is likely to be front-loading of leases with more rent accounted for in the earlier years of the term. This will impact organisations’ profit and loss ratios which have implications for debt arrangements.
CREs will be faced with the ‘balance of probability’ forecasting, having to decide at the start of lease the likelihood of exercising an option, a rent review occurring, what the review amount will be, whether expansion or contraction rights will be utilised. A bit of crystal ball gazing! Added complexity is that investors will be operating under different accounting standards, so the structuring of a lease transaction may be a more protracted negotiation.
The Draft Exposure for these changes is due in September of this year, with full implementation likely to be 2012/2013. However, companies need to start considering the implications and preparing for the impact now. Many organisations will need to overhaul their lease administration systems and may need to staff-up as they are asked to weigh up the balance of probabilities.