Wednesday, March 25, 2009

FASB proposes lease accounting changes

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The FASB has released a Discussion Paper and Snaphot summary to solicit comments on sweeping changes to the accounting of leases.

"According to the World Leasing Yearbook 2009, in 2007 the annual volume of leases amounted to US$760 billion. However, the assets and liabilities arising from many of those contracts cannot be found in entities’ balance sheets. "

This is because leases are splits leases into two categories: capital leases and operating leases. If a lease is classified as a capital lease, assets and liabilities are recognised in its statement of financial position. For an operating lease, the lessee simply recognises lease payments as an expense over the lease term.

Per the Snapshot, if this principal is adopted, the lessee would be required to account for:

  • an asset - for its right to use the leased item (the right-of-use asset)
  • a liability - for its obligation to pay rentals.
"The boards think that ensuring that all leases are depicted on the statement of financial position would significantly increase the transparency and the comparability of lease accounting."

What about renewal options and other lease rights? The FASB proposes that lessees do not "have to recognise renewal, termination or purchase options separately. Instead the lessee would determine whether the option will be exercised."

That seems pretty straightforward, but there are some significant implications.

Take, for example, a tenant with a five-year lease with a renewal right thereafter of an additional five-year term. The tenant would not be required to recognize the renewal option as a separate asset. "Instead, the lessee would determine the most likely outcome—will the lessee exercise its option or not? If exercising the option is the most likely outcome, the lessee would recognise a right to use the real estate for 10 years and an obligation to pay 10 years of rentals."

However, let's be honest. An existing tenant is at a disadvantage in any negotiation because the landlord knows that there are considerable costs involved with a tenant's decision to move its operations. Generally, a tenant's only way to counter this and regain any leverage is if the landlord belives they will actually move.

If that tenant's financials are available on public record, does the tenant's bargaining position diminish if the landlrod knows that the tenant is telling its investors that it is so likely to stay, that it is willing to take a liability on its books? This is one to watch.

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Tuesday, March 24, 2009

Wolf Block law firm to dissolve

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South Florida Business Journal:: "The partners of Wolf Block voted Monday to dissolve the 106-year-old law firm due to a combination of effects of the recession on the firm’s core real estate practice, the constriction of credit and the anticipated departures of significant partners and practices. The firm said it would remain in business for several months to protect the interests of its clients, employees and creditors.

Proposed mergers with two 500-lawyer firms — Philadelphia’s Cozen O’Connor in 2007 and Florida’s Akerman Senterfitt in 2008 — fell through after lengthy, public negotiations. After the Akerman Senterfitt deal collapsed after Labor Day, Alderman said the firm would not entertain other merger possibilities until after its fiscal year ended on Jan. 31. Soon after the end of the fiscal year, when partners collect their year-end compensation, some of the firm’s partners began peeling off. "

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Friday, March 20, 2009

Nonequity partners more profitible

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Google Reader : "Nonequity partners, properly applied, are more profitable than associates, notwithstanding their lower production of hours, for a number of reasons. Firstly, they are considerably more experienced and efficient, and thus a higher proportion of their hours worked are billed and collected.

Secondly, their billing rates are higher, and every hour worked has a higher margin as against the allocation of fixed overhead to them as timekeepers.

Thirdly, they tend to have some book of business, just not enough to justify a full equity partnership position. This provides some breadth and stability to the enterprise business base.

Fourthly, they tend to have some real expertise and help out in landing new cases.

Fifthly, they tend to contribute to the administration and partnership duties, from recruiting, mentoring new associates, all manner of committees, etc., thus spreading the burden among a wider group.

Sixthly, it tends to be very easy to project based on years of past experience what the contribution to the bottom line of the firm will be, and their compensation and benefits packages are correspondingly tailored so that the firm makes a profit spread from every one of them."

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Monday, March 16, 2009

Cap rates could reach late-1990s levels

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The Real Deal South Florida Real Estate News: "'Certain fundamentals were not really looked at over the past few years -- especially in places like Miami that don't have a lot of land. People just expected that property to increase,' said Richard Schuchts, senior vice president at Jones Lang LaSalle who has 12 years experience in the South Florida market. 'Now we're getting back to fundamentals.'

With investors unable to leverage the property the way they would have in 2005, the return on "cash investment" plummets, Schuchts said. Making the deal riskier, buyers also face the prospect of tenants not renewing leases or going bankrupt.

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Four-day work week becoming more common

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According to a survey of 245 companies by Watson Wyatt Worldwide, companies have been reducing workweeks significantly in 2009. According to the findings, 13 percent reduced workweeks in February (up from 2 percent in December). Another 8 percent of companies anticipate reducing the workweek in the next year.

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Thursday, March 12, 2009

Shrinking Legal Labor market

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According to the National Law Journal, a report last week by the U.S. Department of Labor’s Bureau of Labor Statistics revealed that the number of individuals employed in legal services shrank by 4,200 in February. The data also shows about 21,000 jobs were lost in the U.S. legal sector in the past year.