New accounting standards calling for property to be marked to market, and changes in lease accounting rules will strongly impact balance sheets, income statements and the general financial outlook of American companies. Unfortunately, many corporations are not ready to deal with the changes, according to a new report from CB Richard Ellis. The mark-to-market requirement - known as FAS 157 - became effective for financial assets November 15, 2007, and for non-financial assets such as real estate on November 15, 2008.
CBRE’s white paper - entitled “FAS Talking - Unpacking Real Estate’s Impact on Financial Statements” - notes that the estimated balance sheet impact of the lease accounting revisions will be in excess of $1 trillion. According to the report, the combined consequences of mark-to-market and lease accounting changes might negatively impact earnings, capital requirements, debt covenant ratios, credit ratings and other yardsticks of financial health.
Todd P. Anderson, CBRE senior managing director of global corporate services, who wrote the report with Michael M. Omiya, CFO of Boeing Realty Corporation, says that the changes are “a continuation of the effort to have greater financial transparency, in particular in the financial statements of publicly traded corporations.” According to Anderson, “In the absence of comparable sales, you have to figure out how to establish a value for your property.” Corporations should accomplish that before the end of the year when they are on deadline to complete tax and accounting responsibilities. “The corporate real estate department, if it understands what’s going on in the mark-to-market arena, can come in early and start to take a look at its properties and basically create an argument for why it is valuing properties the way it is,” Anderson concludes.