How can you educate stakeholders on lease accounting and valuation concepts and practices?

Lease accounting and valuation are complex and often misunderstood topics in real estate development. They affect how you report your financial performance, manage your cash flow, and plan your future projects. As a developer, you need to educate your stakeholders, such as investors, lenders, tenants, and regulators, on the key concepts and practices of lease accounting and valuation. Here are some tips to help you do that.

1 Explain the lease types

One of the first things you need to explain to your stakeholders is the difference between operating leases and finance leases. Operating leases are short-term contracts that do not transfer ownership or control of the asset to the lessee. Finance leases are long-term contracts that do transfer ownership or control of the asset to the lessee. The type of lease affects how you recognize revenue, expenses, assets, and liabilities on your financial statements. For example, under the new lease accounting standards (IFRS 16 and ASC 842), you have to record a right-of-use asset and a lease liability for both operating and finance leases, whereas under the old standards (IAS 17 and ASC 840), you only had to do that for finance leases.

Add your perspective

Daniel Kaufman

👉 Real Estate Investor | Land Acquisitions | Planning & Architecture | Developer & General Contractor | Asset & Portfolio Management | Blogger | Learn More 👇
Report contribution
Types of Leases: Operating Leases: Short-term leases (usually 12 months or less) where lease accounting rules do not apply. The lessor retains ownership, and the lessee has day-to-day control over the asset. Finance (Capital) Leases: Longer-term leases that require accounting treatment. These leases are considered similar to an outright sale, and the lessee carries them on their balance sheet. ASC 842 and IFRS 16: These accounting standards significantly impact lease accounting. Lessees must now recognize operating leases on their balance sheets, providing investors with a clearer view of long-term liabilities.

Like
Alejandro Arriola Díaz

Managing Director at IBR Law & Consulting | Insurance, Banking and Real Estate
Report contribution
Las diferencias contables de los tipos de arrendamientos si bien se ven en las NIIF, debes verificar en cada país porque no todos adaptan las NIIF al menos no en un 100%. La industria también varia ya que industrias como la financiera les aplica otro tipo de normas contables. El arrendamiento financiero o leasing va a cambiar muchos aspectos y se usa en algunos proyectos como una forma de acelerar ventas ofreciendo alquilar dos años y dar la opción al arrendatario de comprar el inmueble aplicando los pagos de renta como parte de los pagos como compra a un precio pactado desde el inicio, de ese forma puede “probar” el inmueble. El ejemplo clásico el la industria automotriz en US con el leasing.

Translated

Like

2 Demonstrate the valuation methods

Another thing you need to explain to your stakeholders is how you value your leases and your leased assets. There are different methods to do that, depending on the purpose and the perspective of the valuation. For example, if you want to value a lease from the perspective of the lessee, you can use the present value of the lease payments method, which discounts the future lease payments by the lessee's incremental borrowing rate or the interest rate implicit in the lease. If you want to value a lease from the perspective of the lessor, you can use the direct capitalization method, which divides the net operating income of the leased asset by the capitalization rate. If you want to value a leased asset from the perspective of a potential buyer, you can use the sales comparison method, which compares the leased asset with similar properties that have been sold recently.

Add your perspective

Alejandro Arriola Díaz

Managing Director at IBR Law & Consulting | Insurance, Banking and Real Estate
Report contribution
Un uso muy común en la industria de venta de inmuebles para vivienda, oficina o comercio es la venta de inmuebles para inversión ya arrendados. Aquí mucha precaución la valuación es vital, es lo mas importante. Hay quienes cometen un error y es que para ofrecer en venta el inmueble ya alquilado, hacen un cálculo del retorno pero muchas veces no consideran los impuestos como el impuesto sobre inmueble o si consideran un monto por apreciación del valor de la propiedad. Es algo con pocas bases que genera que no se alcance en liquidez la valuación o retorno ofrecido. Si vas a considerar la plusvalía hay que hacerlo valer y agregar también la depreciación, pero es ideal siempre dar un retorno con flujos para evitar estimaciones poco viables.

Translated

Like

3 Share the best practices

The third thing you need to explain to your stakeholders is how you follow the best practices of lease accounting and valuation. These include keeping accurate and updated records of your lease contracts, applying consistent and appropriate assumptions and estimates, complying with the relevant accounting standards and regulations, and communicating clearly and transparently with your stakeholders. You can also share some examples of how you use lease accounting and valuation to optimize your financial performance, such as negotiating favorable lease terms, choosing the optimal lease classification, and maximizing your return on investment.

Add your perspective

Alejandro Arriola Díaz

Managing Director at IBR Law & Consulting | Insurance, Banking and Real Estate
Report contribution
Tal y como explicaba, la valuación tiende a ser subjetiva ya que como al valuar empresas, hay varios métodos para hacerlo y claro que cada uno aplicará el que mas le convenga según su perspectiva. Es por lo anterior que es muy importante exponer dos cosas: -Dar más de una valuación o método de valuación que evite generar un disgusto de un cliente que considero solo con base a una valuación y que se sentirá defraudado. -Explicar los componentes utilizados para obtener la valuación expuesta y muy importante, aquellos no utilizados. Con ambos puntos se logrará transparencia y claridad para hacer buenos negocios y evitar luego reclamos.

Translated

Like

4 Address the common challenges

The fourth thing you need to explain to your stakeholders is how you overcome the common challenges of lease accounting and valuation. These include dealing with complex lease structures, such as variable lease payments, lease modifications, and embedded leases, managing the data and technology requirements, such as collecting and storing lease information, performing calculations and adjustments, and generating reports and disclosures, and adapting to the changing market conditions, such as fluctuations in interest rates, property values, and demand and supply.

Add your perspective

5 Provide the useful resources

The fifth thing you need to explain to your stakeholders is how you access and use the useful resources of lease accounting and valuation. These include professional guidance and advice from experts, such as accountants, auditors, appraisers, and consultants, educational materials and tools from reputable sources, such as publications, courses, webinars, and software, and industry benchmarks and trends from reliable data providers, such as reports, surveys, and databases.

Add your perspective

6 Invite the feedback and questions

The sixth thing you need to explain to your stakeholders is how you welcome and appreciate their feedback and questions. You can do that by creating opportunities for dialogue and interaction, such as meetings, calls, emails, and surveys, listening actively and respectfully to their opinions and concerns, and responding promptly and effectively to their inquiries and issues. You can also ask them for their suggestions and recommendations on how to improve your lease accounting and valuation practices and outcomes.

Add your perspective

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

Add your perspective

How can you educate stakeholders on lease accounting and valuation concepts and practices?

1

2

3

4

5

6

7

1 Explain the lease types

2 Demonstrate the valuation methods

3 Share the best practices

4 Address the common challenges

5 Provide the useful resources

6 Invite the feedback and questions

7 Here’s what else to consider

Real Estate Development

Rate this article

Thanks for your feedback

More articles on Real Estate Development

More relevant reading

How can you educate stakeholders on lease accounting and valuation concepts and practices?

1

2

3

4

5

6

7

1 Explain the lease types

2 Demonstrate the valuation methods

3 Share the best practices

4 Address the common challenges

5 Provide the useful resources

6 Invite the feedback and questions

7 Here’s what else to consider

Real Estate Development

Rate this article

Thanks for your feedback

Explore Other Skills