Introduction:

The Financial Accounting Standards Board (FASB) on August, 17, 2010 released their “exposure draft” requiring companies to record nearly all leases on their balance sheets as a “right to use” asset, and a corresponding “future lease payment – liability”.  What does this mean to your business in layman terms?  This proposal in essence does away with operating leases; all leases (unless immaterial) would be capitalized using the present value of the minimum lease payments.  Therefore, businesses who in the past had off-balance sheet lease obligations, must now record these obligations on their balance sheet.

A key point to consider with regards to the proposed lease accounting changes is that, in all likelihood, existing operating leases, signed prior to the implementation of the new rules, will require reclassification as capital leases that must be accounted for on the balance sheet. This means that real estate professionals must immediately consider the effect that existing and planned leases will have on financial statements once the proposed rules are implemented. Since operating lease obligations can represent a larger liability than all balance sheet assets combined, lease reclassification can significantly alter the businesses balance sheet.

The impact of recording these lease obligations on the balance sheet can have multiple impacts, such as: businesses needing to alert their lenders as they will now be non-compliant with their loan covenants, negotiating new loan covenants with the lenders due to the restated financial statements, ratios used to evaluate a businesses potential of credit will be adversely impacted and the restatement of a lessee’s financial statement once the change takes effect may result in a lower equity balance, and changes to various accounting ratios

The conceptual basis for lease accounting would change from determining when “substantially all the benefits and risks of ownership” have been transferred, to recognizing “right to use” as an asset and apportioning assets (and obligations) between the lessee and the lessor.

As part of FASB’s announcement, the Board stated that in their view “the current accounting in this area does not clearly portray the resources and obligations arising from lease transactions.” This suggests that the final result will likely require more leasing activity to be reflected on the balance sheet than is currently the case. In other words, many, perhaps virtually all, leases now considered operating are likely to be considered capital under the new standards. Thus, many companies with large operating lease portfolios are likely to see a material change on their corporate financial statements.

Part of the purpose for this is to coordinate lease accounting standards with the International Accounting Standards Board (IASB), which sets accounting standards for Europe and many other countries. The IASB and FASB currently have substantial differences in their treatment of leases; particularly notable is that the “bright line” tests of FAS 13 (whether the lease term is 75% or more of the economic life, and whether the present value of the rents is 90% or more of the fair value) are not used by the IASB, which prefers a “facts and circumstances” approach that entails more judgment calls. Both, however, have the concept of capital (or finance) and operating leases, however the dividing line is drawn between such leases.

The FASB will accept public comments on this proposed change through December 15, 2010.  If FASB makes a final decision in 2011 regarding this proposed change to lease accounting, the new rules will go into effect in 2013.

Additionally, the staff of the Securities and Exchange Commission reported in a report mandated under Sarbanes-Oxley, that the amount of operating leases which are kept off the balance sheet is estimated at $1.25 trillion that would be transferred to corporate balance sheets if this proposed accounting change is adopted.

Commercial Real Estate:

The impact on the Commercial Real Estate market would be substantial and will have a significant impact on commercial tenants and landlords.  David Nebiker, Managing Partner of ProTenant (a commercial real estate firm that focuses on assisting Denver and regional companies to strategize, develop, and implement long-term, comprehensive facility solutions) added “this proposed change not only effects the tenants and landlords, but brokers as it increases the complexity of lease agreements and provides a strong impetus for tenants to execute shorter term leases”.  

The shorter term leases create financing issues for property owners as lenders and investors prefer longer term leases to secure their investment.  Therefore, landlords should secure financing for purchase or refinance prior to the implementation of this regulation, as financing will be considerably more difficult the future. 

This accounting change will increase the administrative burden on companies and the leasing premium for single tenant buildings will effectively be eliminated.  John McAslan an Associate at ProTenant added “the impact of this proposed change will have a significant impact on leasing behavior. Lessors of single tenant buildings will ask themselves why not just own the building, if I have to record it on my financial statements anyway?” 

Under the proposed rules, tenants would have to capitalize the present value of virtually all “likely” lease obligations on the corporate balance sheets.  FASB views leasing essentially as a form of financing in which the landlord is letting a tenant use a capital asset, in exchange for a lease payment that includes the principal and interest, similar to a mortgage.

David Nebiker said “the regulators have missed the point of why most businesses lease and that is for flexibility as their workforce expands and contracts, as location needs change, and businesses would rather invest their cash in producing revenue growth, rather than owning real estate.”

The proposed accounting changes will also impact landlords, especially business that are publically traded or have public debt with audited financial statements.  Mall owners and trusts will required to perform analysis for each tenant located in their buildings or malls, analyzing the terms of occupancy and contingent lease rates.

Proactive landlords, tenants and brokers need to familiarize themselves with the proposed standards that could take effect in 2013 and begin to negotiate leases accordingly.

Conclusion:

The end result of this proposed lease accounting change is a greater compliance burden for the lessee as all leases will have a deferred tax component, will be carried on the balance sheet, will require periodic reassessment and may require more detailed financial statement disclosure.

Therefore, lessors need to know how to structure and sell transactions that will be desirable to lessees in the future. Many lessees will realize that the new rules take away the off balance sheet benefits FASB 13 afforded them in the past, and will determine leasing to be a less beneficial option. They may also see the new standards as being more cumbersome and complicated to account for and disclose. Finally, it will become a challenge for every lessor and commercial real estate broker to find a new approach for marketing commercial real estate leases that make them more attractive than owning.

However, this proposed accounting change to FAS 13 could potentially stimulate a lack luster commercial real estate market in 2011 and 2012 as businesses decided to purchase property rather than deal with the administrative issues of leasing in 2013 and beyond.

In conclusion, it is recommended that landlords and tenants begin preparing for this change by reviewing their leases with their commercial real estate broker and discussing the financial ramifications with their CFO, outside accountant and tax accountant to avoid potential financial surprises if/when the accounting changes are adopted. 

Both David Nebiker and John McAslan of ProTenant indicated their entire corporate team are continually educating themselves and advising their clients about these potential changes on a pro-active basis.  

Addendum – Definition of Capital and Operating Leases:

The basic concept of lease accounting is that some leases are merely rentals, whereas others are effectively purchases. As an example, if a company rents office space for a year, the space is worth nearly as much at the end of the year as when the lease started; the company is simply using it for a short period of time, and this is an example of an operating lease. 

However, if a company leases a computer for five years, and at the end of the lease the computer is nearly worthless. The lessor (the company who receives the lease payments) anticipates this, and charges the lessee (the company who uses the asset) a lease payment that will recover all of the lease’s costs, including a profit.  This transaction is called a capital lease, however it is essentially a purchase with a loan, as such an asset and liability must be recorded on the lessee’s financial statements. Essentially, the capital lease payments are considered repayments of a loan; depreciation and interest expense, rather than lease expense, are then recorded on the income statement.

Operating leases do not normally affect a company’s balance sheet. There is, however, one exception. If a lease has scheduled changes in the lease payment (for instance, a planned increase for inflation, or a lease holiday for the first six months), the rent expense is to be recognized on an equal basis over the life of the lease. The difference between the lease expense recognized and the lease actually paid is considered a deferred liability (for the lessee, if the leases are increasing) or asset (if decreasing).

Whether capital or operating, the future minimum lease commitments must also be disclosed as a footnote in the financial statements. The lease commitment must be broken out by year for the first five years, and then all remaining rents are combined.

 A lease is capital if any one of the following four tests is met:

 1) The lease conveys ownership to the lessee at the end of the lease term;

 2) The lessee has an option to purchase the asset at a bargain price at the end of the lease term

 3) The term of the lease is 75% or more of the economic life of the asset.

 4) The present value of the rents, using the lessee’s incremental borrowing rate, is 90% or more of the fair market value of the asset.

Each of these criteria, and their components, are described in more detail in FAS 13 (codified as section L10 of the FASB Current Text or ASC 840 of the Codification).

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As part of his plan to reduce the deficit by an additional $3 trillion, President Obama says wealthy Americans and large corporations need to pay more in taxes in order to repair the nation’s fiscal health. Obama: Tax Millionaires. Republicans: No Way. This is certainly no way to build bipartisan support for a jobs bill. On Monday, President Obama will propose a new minimum tax rate on millionaires as a way to deal with the debt problem. Republicans brushed off an old charge to level against Obama, that the president was engaged in “class warfare.” Read More Who Owns US Debt? View Interactive Feature Of the nation’s debt, about one-third is being financed by foreigners. Take our quiz to find out which countries hold the most in US Treasury securities. See All Video & Multimedia Read more: www.portfolio.com up wealthy Americans and large corporations for an extra $1.5 trillion over the next decade isn’t “class warfare,” according to President Barack Obama. “It’s math,” Obama said today. “The money has to come from somewhere.” The president outlined a plan to slash federal deficits by $3 trillion beyond the $1.2 trillion already called for under this summer’s deficit reduction deal. Obama’s $1.5 trillion in tax increases include something old: ending the lower tax rates for high-income Americans that were enacted during George W. Bush’s administration. These “were meant to be temporary,” Obama said, and the nation can no longer afford “these special lower rates for the …

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One choice you must make when starting a business is whether your accounting year will be the same as the calendar year. This decision has both operational and tax implications.

There are two main operational reasons for selecting a fiscal year to be something other than your calendar year:

Your business cycle, and workflow management.

The most common reason to select a fiscal year that does not end on December 31 is to reflect the natural seasonality of your business. The large retail stores often choose January 31 as the end of their fiscal year. Their business cycle concludes with Christmas shopping, and they allow another month for post-holiday shopping and returns since the numbers are often substantial.

Another example is the information publishing business, in which it’s common to host one large conference every year in addition to one or more smaller events throughout the year. You may sell information on dog training, operate a membership site, and also put on a live dog trainers’ live conference in August of every year. For this business, the business cycle ends with this conference. So, you may to end your fiscal year on August 31, or September 30, so that your income and expense reports reflect how you naturally think about your business.

Workflow management should be considered as well. Small operations don’t have time to be dealing with a year-end close in the middle of their busiest season. Even if you have adequate office staff to complete the accounting work for you, it often makes good business sense to spread their work out more evenly throughout the year. In early January, your financial staff will be preparing 1099s, W-2s, and filing required employment related returns to the IRS and the state(s) in which you operate.

You must also consider taxation requirements, and take into account the IRS rules on the matter. The first place to begin is reading IRS Publication 538. Getting IRS concurrence with your selection of a fiscal year is not always a “given”. “C” corporations have the most flexibility in making this choice.

Generally, your ability to choose a fiscal year other than a calendar year is restricted or not allowed if you:

Are a sole proprietor

Are a partnership, LLC, or “S” corporation

Have previously selected another fiscal year and desire to change it

Are unable to establish a good business reason for ending your fiscal year on a date other than December 31 (except for “C” corporations).

For more in depth analysis on your particular situation, see Publication 538 or consult a tax professional.

Selecting a fiscal year is one of those choices that every business owner must make, whether they realize it or not. Simply using the default calendar year is not a bad choice, in fact, most corporations do. If you’re just starting out, you may want to research this area to determine the best course of action for you.

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Accountancy is full of endless prospects, with many different jobs and the possibility to work your way up in a company. Once training has been completed and the relevant qualification has been gained, those who were trained within a firm are usually offered a permanent job with the company. This won’t necessarily be in the same department as was worked in previously and could be a great opportunity to experience a different area of the company. Ernst and Young is an example of a company that gives its graduate trainees the scope to work in different areas of the firm, as well as offering opportunities to work in an international firm.

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On the morning of Wednesday, April 13, 2011, a group of cyber-activists from US Uncut working in collaboration with the Yes Lab sent out the following press release (yeslab.org GE Responds to Public Outcry – Will Donate Entire $3.2 Billion Tax Refund to Help Offset Cuts and Save American Jobs Fairfield, CT, 13th April, 2011 – GE CEO Jeffrey Immelt has informed the Obama administration that the company will be gifting its entire 2010 tax refund, worth $3.2 Billion, to the US Treasury on April 18, Tax Day, and will furthermore adopt a host of new policies that secure its position as a leader in corporate social responsibility. “We want the public to know that we’ve heard them, and that we know many Americans are going through tough times,” said GE CEO Jeffrey Immelt. “GE will therefore give our 2010 tax refund back to the public and allow the public to decide how to spend it.” Immelt acknowledged no wrongdoing. “All seven of our foreign tax havens are entirely legal,” Immelt noted. “But Americans have made it clear that they deplore laws that enable tax avoidance. While we owe it to our shareholders to use every legal loophole to maximize returns – we also owe something to the American people. We didn’t write the laws that let us legally avoid paying taxes. Congress did. But we benefit from those laws, and now we’d like to share those benefits. We are proud to be giving something back to America, and we are proud to set an example for all industry to follow.” Over the …

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The modern day challenges that the businesses in the today’s world face have found their answers in the form of a charted accountant. To begin with let us first try to understand what exactly the profession of a charted accountant is. The answer to that is that the charted accountants are responsible for a plethora of responsibilities like auditing, accounting, corporate finance, business laws, project evaluation, corporate governance as well as taxation.

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All businesses are required to keep accurate accounts, not only to make timely payments to HM Revenue & Customs, but also to keep track of their profit and losses. Dealing with expenses spreadsheets, purchase ledgers and tax calculations is a full time occupation for an in house bookkeeper, which will cost the equivalent of a full time employee, at the very least. The cost of hardware, software and the time involved all adds up to a large expense, as well as the upgrades and maintenance required. As your business expands your accountancy requirements will increase, resulting in a larger in house bookkeeping team. Outsourcing to an accountant is easier than having your own in house team but will still be costly. Accountancy prices vary wildly, and a cheaper option which is becoming increasingly popular is online accountancy.
Online accountancy removes the need for unnecessary correspondence, which is expensive to send if you use registered post or courier. Important documents have to be sent by courier to prevent them being lost in the mail. Another alternative is to hand deliver your documents, which will take up valuable time which is a precious commodity for any business. Online accountancy prices reflect the reduced requirement for documents to be sent manually to your accountants. You can scan your documents and email instantly for real time results, saving money.
It has always been the general practice for a business owner or manager to spend time with the firm’s accountant going through the company’s finances. This takes a large amount of time, perhaps even days, to deal with. Online accounting allows you to email the relevant paperwork and your accountant can deal with the rest, in the minimal amount of time. Accountancy prices can make up a large proportion of the business expenditure, whereas a business should maintain lean operating costs where necessary. Online accountants are able to offer much lower accountancy prices as they have much lower overheads than a traditional accountants.
The preparation of accounts and the annual self-assessment and corporation tax returns require information provided which is as accurate and up to date as possible. Data which is sent to an accountants manually, may spend a lengthy period of time being sent back and forth between an accountant and his client to make corrections or to amend information. The time and money involved is huge, something that very few businesses can afford. Online accountancy allows both parties to view financial records simultaneously, so that any errors or amendments can be made in real time. This enables your accountant to prepare your accounts and tax return using actual figures rather than estimates, saving you money long term.
Online accountancy is a natural progression for many businesses, as other aspects of life are dealt with on the Internet such as shopping and banking. Using the Internet for many purposes allows you to save money, and online accounting is no exception. By using the latest technology, online accounting can offer reduced accountancy prices, along with actual information being available to ensure you pay the correct amount of tax and National Insurance.

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Deloitte video encourages professionals to think about customizing the client experience to meet the needs of each individual.

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a) What is Forensic Accounting?

Forensic Accounting is the practice of using accounting, auditing and investigative skills to assist in legal matters. It consists of two main areas, litigation support, investigation and resolution of disputes. technically and legally the factual presentation of economic issues represents in connection with existing or pending litigation. In this capacity, the forensic accounting professional quantifies damages that may by involved parties in litigation and sustainableSettlement of disputes, even before reaching the courtroom. If a dispute reaches the court, the forensic accountant to testify as an expert.

Investigation is the act of determining whether criminal matters such as employee theft, fraud, securities (including falsification of financial statements), identity theft and insurance fraud have occurred. As part of the work of the forensic accountant, he or she may recommend actions that may be to minimize futureRisk of loss. Investigation may also occur in civil matters. For example, the Forensic Accountant looking for hidden assets in divorce.

Forensic Accounting encompasses look behind the numbers and grasping the substance of the situations. It is more accounting … more detective work … is a combination that exists as long as human nature is needed. Who does not want a career, such as stability, voltage, and provides financial rewards?

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