By Ed Muna
With the required implementation of new lease accounting standards around the corner, real estate and accounting departments across the country are working feverishly to prepare for the new Financial Accounting Standards Board (FASB) Rule, ASC 842.
What is ASC 842? This new standard requires lessees to record lease obligations that are longer than one year on the company’s balance sheet as a Lease Liability and Right-of-Use Asset. Prior to the modification, financial lease rights and obligations only needed to appear on the income statement. ASC 842 requires that both operating and capital leases are now subject to the balance sheet provision.
While this new directive on lease obligations was issued in February of 2016, its implementation and compliance are set to begin for public companies in January 2019 and private companies in January of 2020. The time lag left many CFOs feeling secure that their teams could institute the proper methodologies, gather and discern the requisite financial data and conform to the new Accounting Standards Update (ASU) in short order and without utilizing extensive resources.
Unfortunately for CFO’s, the implementation is proving to be far more complicated than originally thought. Right now, with 2019 compliance looming, executives are viewing ASC 842 as a complicated puzzle, and are pressing to meet the challenge.
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Over time, the reporting will be beneficial as a means to improve transparency and align with revenue recognition standards, however; navigating the ASC 842 labyrinth in the now truncated time window requires that accounting departments receive information and financial input from their facility team members, auditors and property landlords.
Even more so, leveraging the expertise of an experienced lease administrator can create certainty and provide clarification on a host of ASC 842 issues. A recent EY survey stated that only 27% of organizations believe they are on track and confident of meeting the deadlines.
The data collection aspect of ASC 842 compliance is a central component for tenants. The tools required for this exercise go well beyond spreadsheets and a simple examination of lease documents. In many cases, a software solution may be the best option for a business, particularly if there are numerous leases, multiple business lines, or varying structures and renewal options.
While a firm’s balance sheet will ultimately convey the Lease Liability and Right-of-Use Asset figures, the formula will involve more than a present value calculation.
Feel overwhelmed? At Hughes Marino, our Lease Administration team works side-by-side corporate tenants to gather and calculate the information needed to properly capitalize the leases for the balance sheet. Contact one of our talented and experienced lease professionals to facilitate accounting compliance with ASC 842.
Ed Muna is a senior vice president of Hughes Marino, an award-winning commercial real estate company specializing in tenant representation and building purchases with offices across the nation. Ed heads Hughes Marino’s Lease Administration and Audit Service divisions and helps tenants address issues that arise during their occupancy. Contact Ed at 1-844-662-6635 or email@example.com to learn more.