‘Storm in a teacup’ over new standards on leases

Posted On Wednesday, 24 August 2005 02:00 Published by eProp Commercial Property News
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Is the furore surrounding new accounting requirements on operating leases a storm in a teacup?

Riaan EksteenRiaan Eksteen, a partner in the financial institutions team at accounting firm Deloitte, seems to think so, saying the issue has been "blown out of proportion" and it is evident that many listed property companies have not engaged with their auditors on the issue.

Eksteen says that if companies make a few adjustments to their financial results, they cancel out the effects of streamlining operating leases and their results will still reflect the true picture of the company.

Last week the outcry about new accounting requirements on operating leases gathered steam, with Ambit CEO Nick Harris saying the requirements were "diabolical for the listed property sector".

The South African Institute of Chartered Accountants said last month that the adoption of international interpretations of operating leases might result in changes to reported results.

The institute said an accounting issue had arisen over the basis on which the cash flows relating to operating leases should be allocated to different periods during the lease period.

For example, the accounts of a property landlord — such as a listed property unit trust and property loan stock company — that entered into a 10-year lease agreement with a tenant, with a 5% increase every year, would normally reflect varying amounts of income for each financial year over the 10-year period.

Now landlords will be required to reflect the average income received over a 10-year period in each financial year.

This means that listed property companies and funds will have to account for money they have not yet received. Listed property players have complained, saying this could result in grossly misstated and inflated accounting earnings for the year.

But Eksteen says that international accounting standard 40 states that a lessor should exclude prepaid or accrued operating lease income that arises from the accounting for lease rental income on a "straight-line" basis from the fair value of the property in order to avoid any double accounting on the balance sheet.

He says this cancels out the effect of the "averaging".

Last modified on Thursday, 22 May 2014 09:06

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