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Presentation Transcript
Presenter introduction
Presenter Introduction

Todd Anderson is Senior Managing Director of CB Richard Ellis’ Global Corporate Services group in Los Angeles, California. He is the Alliance Director for The Boeing Company providing the strategic oversight and account team management to serve their 88 million square foot global real estate portfolio.

Mr. Anderson is a regular real estate industry speaker and contributing author of articles, as well as, a “Top Rated” faculty member of CoreNet Global’s Executive Development Program in each consecutive year since 2000.

Todd P. Anderson,MCR, SLCR, CASSenior Managing Director, Global Corporate Services CB Richard Ellis, Inc.Email: [email protected]


Real estate impact on financial statements

Counselors of Real Estate

REAL ESTATE IMPACT ON FINANCIAL STATEMENTS

Hot Topic

SFAS 13: Proposed Capitalization of Operating Leases

Presented by:Todd P. Anderson

Senior Managing Director

Global Corporate Services


Agenda
Agenda

  • Evolving FASB/IASB Positions

    • Capitalization of Operating Leases?

      • SFAS 13/IAS 17 – Accounting for Leases

      • Leases: Preliminary Views – March 19, 2009

  • Single Lease vs. Portfolio

    Single Property Example

    Portfolio of Properties Example

    3.Bottom LineStrategic Portfolio Planning

    Preemptive Compliance


Fasb lease definition

1.

FASB Lease Definition


Sfas 13 accounting for leases
SFAS 13 – Accounting for Leases

  • Capital or Operating lease; paragraph 7 a-d

  • Possession Date; 13-1 paragraph 2 & 3

  • Lease Term; FASB Technical Bulletin 88-1

  • Renewal Periods; paragraph 5 (f) and (o)

  • Straight-line rental rate; paragraph 15

  • CPI adjustments; paragraph 5 (n), SAB 101

  • Lease incentives; FASB Technical Bulletin 88-1, paragraph 7

  • Leasehold Improvements; paragraph 5 (f)

  • Other FASB Lease Reference Documents

    • SFAS 13, 23, 29, 98

    • Technical Bulletins 88-1, 85-3

    • FASB Staff Position 13-1

    • SEC Chief Accountant Letter February 7, 2005 to AICPA Chairman


Sfas 13 paragraph 7 a d capital lease
SFAS 13 – Paragraph 7 a-d Capital Lease

Capital Lease (on balance sheet) if any one of 4 criteria:

  • Automatic Transfer of Ownership

  • Bargain Purchase Option

  • Lease term exceeds 75% of remaining useful life

  • The PV of rent exceeds 90% of fair market value

    • Determined at inception of lease term

    • Minimum fixed term (extensions if highly likely)

    • Minimum lease payments, plus any cancellation payment

    • Discounted at Lessee’s incremental borrowing rate

      • Risk-free credit-adjusted rate

      • Incremental borrowing rate



Future balance sheet impact asset increase liability decrease equity decrease
Future Balance Sheet ImpactAsset Increase, Liability Decrease, Equity Decrease

SFAS 13/IAS 17: Capitalization of Operating Leases?

  • Currently off-balance sheet

  • Proposing on-balance sheet treatment (capitalization)

  • $1.3 trillion “estimate” for U.S. Companies


Future income statement impact expense increase earnings decrease
Future Income Statement Impact Expense Increase, Earnings Decrease

SFAS 13/IAS 17 – Capitalize Operating Leases

  • Eliminate rent expense

  • Add depreciation expense (over lease term)

  • Add imputed interest expense (amortized over lease term)





Single lease vs portfolio lease capitalization implications

2.

Single Lease vs. PortfolioLease Capitalization Implications


Single property example continued
SINGLE PROPERTY EXAMPLE (Continued)

Four 5-Year Leases

One 20-Year Lease

INCOME STATEMENT – Total Expenses

INCOME STATEMENT – Total Expenses

BALANCE SHEET – Change in Equity

BALANCE SHEET – Change in Equity


Portfolio of properties example continued
PORTFOLIO OF PROPERTIES Example(Continued)

Renew with New 5-Year Leases

Renew with New 20-Year Leases

INCOME STATEMENT – Total Expenses

INCOME STATEMENT – Total Expenses

BALANCE SHEET – Change in Equity

BALANCE SHEET – Change in Equity


Incorporating future rent adjustments

Changing Incremental Borrowing Costs

Treatment of lease renewals and options

Triple net (NNN) rent equivalents

Challenges to Implementation


Bottom line how cre can support influence corporate direction

3

BOTTOM LINEHow CRE can Support/InfluenceCorporate Direction


Ratios (EPS, ROA, ROE, EBITDA, etc.)

Debt covenants

Capital requirements

Credit ratings

Taxes

Standards and Rules of Thumbs

Performance Measure Impacts


Pre emptive lease capitalization strategies
Pre-emptive Lease Capitalization Strategies

  • Lease administration

    • Centralized

    • Comprehensive

    • Consistent Format

  • Financial Analysis

    • Net Book Value assessment

    • Performance Measure Impact

    • Competitive Industry Position

  • Portfolio Optimization Strategies

    • Portfolio Composition

    • Short or long term leases

    • Lease vs. own considerations


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