Impact of Lease Accounting Standards on Commercial Real Estate

ARTICLE | August 05, 2024

Lease accounting standards for businesses were revamped in 2019, when the International Financial Reporting Standards (IFRS) introduced IFRS 16 and the U.S. Financial Accounting Standards Board (FASB) implemented ASC 842. 

These changes to the lease accounting standards alter how leases are recognized, reported, and managed, making it essential for commercial real estate owners to understand the changes and adopt strategies for compliance.

Impact of standards on commercial real estate owners

The primary change with IFRS 16 and ASC 842 is that businesses now have to recognize lease assets and lease liabilities for virtually all leases on their balance sheets, which fundamentally changes financial reporting. As a result, commercial real estate owners may see changes in key financial metrics such as leverage ratios that affect their ability to secure financing and attract investors.

Another change is in lease classification. IFRS 16 and ASC 842 classify leases as either finance or operating leases, based on criteria such as transfer of ownership and purchase options. Commercial real estate owners need to carefully assess lease agreements to determine the appropriate classification because it affects financial statement presentation and disclosures.

The changes in lease accounting standards also may influence lease negotiation dynamics between landlords and tenants. Real estate owners should consider the potential impact on lease terms, and structure deals accordingly to optimize financial outcomes.

Compliance strategies for commercial real estate owners

Given the complexity of the new standards, commercial real estate owners will probably want to seek guidance from accounting professionals with expertise in lease accounting. Collaborating with qualified professionals can help ensure an accurate interpretation of the standards and adherence to compliance requirements.

Compliance concerns are also a compelling reason to invest in lease accounting software capable of handling the complexities of IFRS 16 and ASC 842. A best-in-class cloud-based accounting software solution like Sage Intacct offers the full suite of accounting, reporting, and document management capabilities needed to ensure compliance. Advanced ERP solutions can also streamline lease management processes and provide valuable insights into lease portfolios.

Of course, technology alone isn’t enough. Commercial real estate owners need to establish procedures for ongoing monitoring of lease agreements. Periodic compliance reviews can promptly identify any discrepancies or non-compliance issues, and regular audits and internal controls help maintain accuracy and integrity in financial reporting.

The benefits of professional guidance

The complexities of the new lease accounting standards make professional assistance helpful for managing leases efficiently, using the right software, processes, and tools. Insero & Co. has a team of experts who can help commercial real estate owners stay in compliance, identify and implement the right software solutions, track leases, and assist with complex lease transactions. 

Our experts can also review your existing contracts before you sign any new ones, guiding you toward whichever deal structure will be most beneficial to your business.