New lease accounting rules will mean more paperwork

August 25, 2011

New accounting rules will increase paperwork associated with leasing space.

Q: My real estate adviser says new accounting rules will greatly increase the paperwork associated with leasing space. What should I do?

A: Your adviser is correct. The Financial Accounting Standards Board (FASB) has come up with new rules of lease accounting that, if finalized, will treat leased space as an asset and rental payments as loan payments with an imputed, or built-in, interest rate. Only the imputed interest will be deductible for tax purposes, and so far the FASB has provided little guidance on how to calculate that number.

For tax purposes, a lease will be assumed to extend through all renewal options and will be shown as a liability on your balance sheet. This means, for example, that if you have a 10-year lease and two 5-year options to renew, you may have to treat the obligation as a 20-year lease, even though you have no fixed obligation after year 10.

To deal with these new rules, inventory your leases and list every obligation. Next, come up with a plan to estimate future lease costs and to re-estimate these costs during each reporting period.

When you enter into a new lease or renewal, calculate the optimal lease term based on the new requirements and your needs for the right space. It may be that buying your space outright or as a condominium would work better.

Send your money management questions to medec@advanstar.comAnswer to our reader's question was provided by Marisa Manley, president, Healthcare Real Estate Advisors, New York, New York.

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