New Accounting Standards Will Drive Changes in Real Estate Industry Practices

By John W. Hanley, Jr.

In August 2010, the Financial Accounting Standards Board (FASB) released proposed new accounting rules for real estate and equipment leases. If these rules become effective, they will dramatically change the way leases are reported in the financial statements of public and private companies and nonprofit organizations. They will have a substantial effect on the structuring and administration of leases, and on the usefulness of certain common lease terms, such as term extension options and formulaic rent escalations.In the real estate industry, where ground, space, and equipment leases have been used since the Pilgrims for a wide range of purposes, the impacts will be significant. The proposed accounting standards will be adopted, in final form, sometime next year, with an effective date still to be determined. Once effective, they will apply to all existing leases—even though such leases may have been structured with an eye on current accounting principles—and to all new leases. It is not too late to make objections to FASB about these proposed standards—nor too early to begin planning for these possible changes.

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About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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