Economy Watch: Study Warns of Adverse Impact of Accounting Rule Change on CRE

By Dees Stribling, Contributing Editor

A group of CRE and other nonprofit  business organizations released a report late last week that asserts that proposed changes to U.S. lease accounting standards, which are currently governed Financial Accounting Standards Board (FASB), would have a detrimental impact on job creation, besides the health of American CRE. The organizations sponsoring the report included U.S. Chamber of Commerce, the Real Estate Roundtable, NAIOP, the National Association of Realtors, the Building Owners and Managers Association International and others.

At issue is whether U.S. standards—Generally Accepted Accounting Principles—should very closely match those of the International Accounting Standards Board (IASB), which are known as International Financial Reporting Standards (IFRS), and which are used in a number of other parts of the world, including the nations of the EU and some Asian nations. The study, “The Economic Impact of the Current IASB and FASB Exposure Draft on Leases,” specifically looks at how the proposed standard would negatively affect job creation, the health of the U.S. real estate sector and liabilities of U.S. publicly traded companies.

The study found that the economic impact of changing the U.S. standards would include increasing liabilities for U.S. public companies by $1.5 trillion, because under IFRS, among other things, operating leases are counted as liabilities, whereas according to GAAP, they are not (to simplify things a bit). Also, according to the study, the changes would increase costs to U.S. public companies by $10.2 billion annually; potentially lead to job losses of over 190,000; reduce U.S. household earnings by $7.8 billion annually; and lower U.S. GDP by $27.5 billion each year annually.

“A failure to fully understand the economic ramifications of these accounting changes or to address these issues may harm businesses that own, invest, or rent commercial real estate or use leases for other purposes,” BOMA international chair Boyd R. Zoccola, executive vice president, Hokanson Companies Inc., said in a press statement. “Thoroughly vetted and sound accounting standards are needed to create certainty in the marketplace for investors and businesses alike. A comprehensive examination of the costs and benefits should be a part of that process.”

Developed world barely grew in fourth quarter

The Organisation for Economic Co-operation and Development (OECD), the Paris-based international think tank, estimates that quarterly gross domestic product growth among its members—the 34 developed nations of the world—decelerated sharply to a minuscule 0.1 percent during the fourth quarter of 2011, compared to growth of 0.6 percent in the third quarter. During the fourth quarter of 2010, the OECD growth rate was 1.3 percent.

Much of the growth recorded by OECD members is the result of expansion in the United States, where GDP growth was 0.7 percent quarter-over-quarter in 4Q11, up from 0.5 percent in the third quarter. The organization chalks up the drop in the 34-nation aggregate to—no surprise here—the European Union, were GDP fell by 0.3 percent, the first drop since the second quarter of 2009.

In Europe, meanwhile, in the wee hours of Tuesday euro-zone finance ministers finally approved the second round of bailout funds for Greece, which will total 130 billion euros (about $172 billion, or for comparison, about the same as the 2010 gross state product of Alabama). Under the terms of the deal, the Greeks are supposed to cut their debt to 121 percent of GDP by 2020. It isn’t clear that either the euro ministers or the Greeks believe that such a thing will actually happen. The judgment of investors on that question will come soon. The judgment of the Greek people has already come, in the form of riots.

Wall Street was closed Monday for Washington’s Birthday (known in car commercials as Presidents’ Day), but on Friday the exchanges ended mixed. The Dow Jones Industrial Average was up 45.79 points, or 0.35 percent, while the S&P 500 gained 0.23 percent. The Nasdaq lost 0.27 percent.