Federally proposed changes in accounting standards regarding leasing and depreciation of commercial space will go into effect over the next few years and will make major changes in the way many business must report their liabilities. These new changes affect the reporting of liabilities for leases on all types of property and equipment, including cars, office equipment, and real estate, according to Michael VanderGroot, a CPA and senior compliance officer with BC Compliance Group in Matawan.
VanderGroot will be one of two instructors presenting “Cost Segregation — How to Maximize Depreciation and Proposed Lease Accounting Standards” at the Middlesex-Somerset chapter of the NJ Society of CPAs on Thursday, December 2, at 8:15 a.m. at the Somerset Holiday Inn. Cost: $50 at the door. Register online at www.njscpa.org.
The other instructor is Jerome Kootman, who will will teach the segment on cost depreciation. Kootman is the founder and managing tax director for Cost Recovery Solutions, a valuation consulting and cost segregation firm based in Metuchen. He received a bachelor’s in accounting and business administration from the University of Kansas.
Few property owners take full advantage of depreciation benefits, says VanderGroot. The course will discuss recent developments relative to depreciation and cost segregation as well as important cases in the evolution of cost segregation.
The changes in lease accounting standards will go into effect sometime in the next two years, says VanderGroot, but business owners need to begin preparing now. VanderGroot, a 1991 graduate of Monmouth University, where he earned his bachelor’s in accounting, has worked in the real estate accounting and compliance field since 1994. He has been a controller and operating officer for several real estate companies ranging from a start up developer to a mature multi-national developer, owner, and property manager.
“Once these changes are in place it’s estimated that at least $1.3 trillion that were not seen before will hit the balance sheets as liabilities,” says VanderGroot. “The new reporting requires that the expense of the lease be front loaded.” Currently expenses can be reported over a period of several years. In the new system expenses would be reported in the first year of the lease.
Who is affected? Not every business owner will be affected by the changes. “Only businesses that do their books and recordkeeping on GAAP (generally accepted accounting practices) or IFRS (international financial reporting standards) accounting forms will see a difference,” says VanderGroot. If you are a mom and pop store doing your business on a cash basis, you don’t have to worry unless you have a loan with a bank that requires you to use certain forms.
While a business that leases one or two pieces of equipment or an automobile may see some small changes in their accounting balances, the businesses that will see the greatest effect are those that lease real estate. “The people that will be hit the hardest are retailers, particularly larger retailers who lease space at a number of locations,” he says.
How to prepare. Business owners should check with their accountants to determine what the impact will be on their particular businesses. They should make sure that they have all documentation in place and should get assistance from an expert to learn how to implement the new standards and make the calculations, VanderGroot says.
In addition, he suggests checking with your banker to make sure that the new way of reporting will not affect your loan in any way. “Banks will have to adjust. They are, themselves, lease-holders, after all,” says VanderGroot. It may, however, take some time before all of these “adjustments” are made.
Effects on real estate industry. Individual businesses will certainly see an effect from the new regulations, but the real estate industry itself may see the most change. Right now people often lease commercial space because of the way in which it can be expensed on their books. The new reporting requires that the expense of the lease be “front-loaded,” removing that advantage.
“Now, since they must put the whole liability on the books, they may be more likely to consider buying,” he explains. One possible change he sees from the new regulations is an increased interest in condo-type arrangements, allowing the business owner to own a portion of the building, while not being forced to deal with maintenance issues.
In reality, the changes in accounting practices do not make any difference in the bottom line of a business. It is either making money or it is not. It does, however, “change how the business looks,” says VanderGroot. The proposed changes are designed to increase transparency, he says.
In the end, VanderGroot is still uncertain whether the changes will be good or bad. “The question is how market analysts will react to the changes,” he says “What hasn’t changed is the need to look at a business on an ongoing basis,” to look at the overall picture to see if it is making money or not.