The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) continue to work on proposed lease-accounting rules that would have far-ranging consequences for apartment firms.
Under current law, leases are reflected on balance sheets as income is received. Under the new proposed rules, for the first time, leases lasting longer than 12 months (including optional renewal periods) would have to be placed on the balance sheet upon inception.
If enacted, this change could have an enormous impact on how multifamily housing firms account for leases. First and foremost, firms would have to modify their lease management software to facilitate the new accounting treatment. Second, firms would have to decide whether to use two different standards: One for leases under a year and another for longer-term leases.
NAA/NMHC are closely monitoring FASB/IASB’s action in this area. The rules were originally set to be finalized in June; however, FASB/IASB acknowledges that the deadline will not be met. Many observers believe that the rules will be completed by December, but it is unlikely they will be made effective before 2013. Importantly, although the Securities and Exchange Commission (SEC) generally relies on FASB—a non-governmental body—to set accounting standards, the SEC is the final arbiter of any rules.
In a case adjudicated earlier this year, the U.S. Tax Court held that construction firms that substantially renovated real property are eligible for the domestic production activities tax deduction (Gibson & Associates v. Commissioner, 136 T.C. No. 10). The Court found that whether a renovation is considered “substantial” turns on the question of whether: (1) the value of the property increased materially; (2) the life of the property was significantly prolonged; and/or (3) the property could be adapted to a new use. The Tax Court’s decision can be found at:
www.ustaxcourt.gov/InOpHistoric/gibson.TC.WPD.pdf.