Monday, January 7, 2013

SURPRISE: Accounting Rule Proposal Rankling Europeans Too!

Much to my surprise last week, I came across an article from the Financial Times indicating that European business people are very concerned about proposed accounting rules changes -- changes I first warned about back in 2010 when it was first proposed.

Imagine my surprise! From multiple disciplines -- financial planners to corporate accounting specialists and commercial real estate/investment advisers, such as myself -- experts are roundly criticizing the proposed changes.

Why am I shocked? Because in the U.S. this proposal has been universally promoted as bringing the U.S. into line with the way European accounting works. Only the Europeans are asking why this proposal is being foisted upon them.


At issue is an entirely different way of looking at corporate liabilities, under the flimsy guise of protecting investors. The proposal purports to make transparent corporate liabilities, in order for investors to be able to make better decisions on whether they wish to invest in any given publicly held corporation. The impact on corporate real estate, both for owners, and for lessees (particularly publicly held companies) is significant. The most onerous of the requirements states that "options" to renew a lease must be shown as a current liability on the balance sheet (actually this applies to privately held firms also). EVEN IF THE OPTION ISN'T EXERCISED, the stated future rent costs are to be shown as a liability now. Which makes absolutely no sense to even the most accounting illerate folks you explain it to!

I have written on this subject numerous times over the past two years. It made no sense then. It makes even less sense now, considering that the powers that be promoting the change -- the Financial Accounting Standards Board here in the U.S., and the International Accounting Standards Board -- have been, I believe, less than truthful about the needs for these changes.

Now, in a letter to the IASB, the UK's Financial Reporting Council and the Accounting Standards Committee of Germany say they fear problems with the new approach, though their concern is that corporations will abuse the new system somehow. From France, the accounting stand setting body there, the ANC, is also critical of the current reform.

Our British "cousins" use the word "scheme" to refer to a plan. In the U.S. the word technically is definied similarly, but in common use has a more nefarious meaning, more akin to a secret undertaking with the intent to defraud.

With that said, IMHO, knowing now that Europe doesn't like it any more than I do, I would suggest that this scheme to push for worldwide accounting rule changes is bureaucreatic nonsense with seriously doubtful progress for anyone. Opposition to these changes is going to cause significant changes in leasing. I would not be recommending lease options to renew. And this will also cause a stagnation in growth of property values. Values today are often not only based on schedule income, but also the rent bumps and renewal options in place.

So why do this? I'm no conspiracy-type. But except for bureaucrats and others looking to make the system more byzantine, therefore guaranteeing consulting work -- or government jobs -- for life to the watchers, I see no benefit. The argument about "transparency" wore out its welcome a long time ago.

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