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28
dTZ | In Situ
The Finance director often casts a shadow over the property decision-making process, using a set
of increasingly complicated rules that can appear to frustrate good, commercial opportunities.
In order to match the capital expenditure incurred on a fit-out
with the expected income generated by operating from this
building, the fit-out cost is spread by the depreciation charge
over a 10 year period.
In figure 2, there are three profit and loss account profiles
created by changing three simple accounting policies:
•
Spreading the rent-free period or taking the benefit in the
first two years
•
Writing off the fit-out cost over a 10 year period or over the
period to the lease break
•
Taking dilapidations as a cost at lease end when incurred, or
building up a provision over the final three years of the lease.
These are all valid policies in the appropriate circumstances and
in some years there are dramatic differences in the profit and
loss account charges. The total cost over the 15 year period is
£50 million for all three scenarios but the nPV at 8% ranges
from £27.9 million to £29.0 million.
complications arise from the rules set out in the accounting
standards. however, these standards are really a framework,
with certain hard points, where there is scope in the
implementation to come up with different results.
So, here is a simple lease acquisition to demonstrate this point.
Let us assume a 15 year lease with a break at year 7, a rent-
free period up front, some fit-out works and an amount for
dilapidations at the end of the lease.
The total all-in cost over the 15 years comes to £50 million.
Figure 1 shows the comparison between cash-flow and profit.
The goal posts seem to move on a regular basis — a decision
made last year based on the profit and loss account impact
would result in a different outcome today because of cash
constraints; or the taxation implications skew the economics; or
we now report under uS GAAP and the accounting treatment
is different. The big unknown which has been hanging over
property decisions for many years now is the proposed change in
lease accounting.
despite appearances, accounting at one level is quite straight-
forward. If you spend £50 million cash on a leased property and
associated costs through the life of the lease, then the profit and
loss account will incur a charge of £50 million.
This example demonstrates that even in a simple scenario there
is scope for accounting policies to have a dramatic impact on
numbers that affect business decisions. As situations become
more complex (surplus leases for example), the scope for
variations in accounting impact become greater. Alternative
choices on how accounting policies are implemented come with
advantages and disadvantages, but if accounting policies are
evaluated and set on a proactive basis, they can be made to work
for the organisation.
The impending release of the updated lease accounting exposure
draft provides the ideal opportunity to revisit accounting policies
and make sure they are helping your business rather than
hindering it.
FIGure 2
4,500,000
4,000,000
3,500,000
3,000,000
No spread - 10
Spread - 10
Spread - 7
2,500,000
2,000,000
1,500,000
1
3 5 7 9 11 13 15
FIGure 1
14,000,000
12,000,000
10,000,000
8,000,000
Cashflow
Profit
and Loss
6,000,000
4,000,000
2,000,000
1
3 5 7 9 11
13 15
15 year
lease break
at year 7
50,000 sq ft
other
revenue
costs
£5 per sq ft
Rent
£30 per sq ft
fit-out
£220 per sq ft = £11m
Rent-free
18 months
dilaps
£20 per sq ft = 1m
Rates
£12 per sq ft
15 year
total cost
£50m
Accounting
A help or a hindrance?
