Insights from Our Experience
By Ed Muna
In less than a year, private companies will need to implement a new accounting standard for the reporting of lease obligations. The new standard, ASC 842, was issued by the Financial Accounting Standards Board (FASB) in 2016 and goes into effect in January 2020 for private companies. ASC 842 now requires lessees to record lease obligations that are longer than one year on the company’s balance sheet as a Lease Liability and a Right-of-Use Asset. Prior to the change, these obligations were only recorded on the income statement.
Having spent the past year working with public companies that needed to adopt the new standard by the first quarter of 2019, we know how critical it is for private companies to turn their focus on the new accounting standards around the corner. Through the experience, we can share some helpful insights we learned on the process.
+ This is a team effort. This is not something that the accounting, real estate or management team can do alone. Working together with a strong software solution and lease administration partner is critical.
+ The data is not obvious. The gathering of information is perhaps the biggest challenge. One of the assumptions many companies make prior to tackling the changes is that all the data is easily available in the leases or on an excel spreadsheet. This is far from the truth. While the rent obligation is in there, the capitalization of a lease cannot be made without critical inputs from the accounting and lease decision makers. For example, what was the company discount rate at the time of signing?
+ This is new to everyone. The new rules by FASB are not as black and white as you would hope. There can be several interpretations and accounting firms are still adjusting as well. Working with accountants, auditors and real estate advisors will prove beneficial to make sure your interpretation can hold its ground.
+ It will take longer than you think. Because of the above factors, companies should begin planning today. Per studies by firms like EY, public companies fell behind on the implementation because it is more challenging than they anticipated.
The whole implementation is a time-consuming group effort and can be overwhelming if not faced with proper plan and resources. At Hughes Marino, our team is assisting in the process with clients and has systems in place to help companies get on track and wrap their arms around what will be a significant addition to their balance sheet. Proactive companies are embracing this reality and finding a lease administration partner, and we would love the opportunity to become an extension of your own team and assist you with the challenges ahead.
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 Portfolio Lease Administration & Advisory Services team and helps tenants address issues that arise during their occupancy. Contact Ed at 1-844-662-6635 or firstname.lastname@example.org to learn more.