UNITED STATES - The vast majority of companies in the US are not ready for new lease accounting standards that could be introduced as early as the summer, according to Deloitte.
The accountancy firm carried out a survey of company executives and found that only 7% were 'extremely prepared' or 'very prepared' for the new standards proposed by the US Financial Accounting Standards Board (FASB).
The changes could be finalised as early as June 2011 and would require firms to fundamentally change how they account for commercial real estate leases.
The new standard would effectively eliminate all operating leases and require them to be capitalised on the company's balance sheet.
Real estate owners, on the other hand, would see rent payment expense reporting replaced by interest and amortisation expense reporting.
Josh Leonard, a leader in Deloitte's real estate consulting practice, said: "These changes will have an immense impact on many companies that lease commercial property.
"Beyond the major changes involved, companies need to start looking at their lease portfolios now for adequate lease information, technology capabilities and resources to implement and monitor the new standard, expected to be final by mid-year 2011."
More than 80% of survey respondents believe the lease accounting standards will place a significant burden on financial reporting for tenants as well as property owners, while 40% said the new standards would make it more difficult to obtain financing.
More than two-thirds (68%) said the changes would have a material impact on their debt-to-equity ratio, and roughly 40% thought the new lease standard would lead to shorter-term leases.
Bob O'Brien, vice-chairman and real estate services leader for Deloitte, said: "For the real estate industry, the impact of the proposed new lease accounting changes will impact both the balance sheet and tenant strategy and execution.
"For owners and operators, the big shift will be in what their tenants demand. Shorter-term leases may be in high demand, along with an increased tenant appetite to forego renting in favour of buying."
O'Brien said the changes would also affect how real estate companies operated in future.
"The proposed new leasing standards will require a re-examination of capital expenditures on new leases, enhanced lease administration and forecasting systems, and careful consideration of the balance sheet and income statement impacts on existing loan covenants," he said. "The changes may be sweeping."