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New Transition Option for Lease Standard

Earlier this month, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) which would provide an additional transition option when adopting the new lease accounting standard. Under the proposed ASU, organizations would have the option to use the effective date as the date of adoption instead of at the earliest comparative period presented in the financial statements. Under this proposal, previous periods would not have to be restated and organizations would not have to apply the disclosure provisions of the new standard to periods prior to the effective date.

This option will certainly ease and simplify transition for many organizations but as the effective date for both public business entities  and other entities is growing nearer, organizations should not delay any longer in assessing and planning implementation of the new lease standard.

Governmental Accounting Standards – Leases

In June 2017, the Governmental Accounting Standards Board (“GASB”) issued Statement No. 87 – Leases which establishes new accounting standards to be applied to all lease transactions for state and local governments. The Standard is effective for fiscal periods beginning after December 15, 2019 with earlier application encouraged.

The governmental standard follows most of the principles established in the new leasing standard issued by the Financial Accounting Standards Board (“FASB”) with some notable exceptions. As with the FASB approach as it pertains to lessees, all leases, except short-term leases, must be recognized on the balance sheet with a lease liability and an offsetting right to use asset. However, short term leases (defined as those leases with a maximum lease term of no longer than 12 months) must use the accounting now in place for operating leases – there is not accounting election that is available.

Most notably, the new GASB standard follows the principle that leases are financings of the right to use an underlying asset. Therefore, with respect to lessees, there is a single amortization method to be applied to the right to use asset which will accelerate expense recognition.

In general, GASB disclosure requirements related to leases are not as onerous as the FASB standard and transition provisions are more flexible.

State and local governments should begin assessing now the extent of their leasing activities and establish a transition plan for implementing the new standard.

iLeasePro adds Subsidiary / Operating Entity capabilities

The Subsidiary function in iLeasePro allows a corporation with multiple subsidiaries to maintain its entire corporate wide lease portfolio on a single iLeasePro platform. When it is time to upload periodic journal entries to a general ledger system of record, the user designates the subsidiary to which the lease is associated and the entry is posted to the subsidiary general ledger.

The New Lease Accounting Standards and Technology Requirements

Earlier this week, I participated on a webinar on the new lease accounting standards. The webinar was given by one of the major accounting firms and was specifically directed at how the new lease standards will impact lessees.

One of the polling questions asked of participants during the course of the webinar was whether, in the course of adopting the new standard, the participants’ organizations intended (a) to upgrade their systems-based solutions; (b) use Excel or (c) whether they had not decided. The responses were as follows: 25% will likely upgrade IT, 25% will likely use Excel and 50% had not decided.

Although hardly a statistically valid survey, the responses lead me to believe that a significant number of lessees have yet to have a complete understanding of the nature of the accounting changes and the additional complexity involved in complying with these changes. Not only will the basic accounting become more complicated, the footnote disclosure required is much more comprehensive resulting in accumulating financial data that had not been required previously.

We at iLeasePro continue to emphasize the need for early analysis and preparation so that organizations do not get surprised late in the process. Make sure that all of your stakeholders within the organization understand how the new standards impact not only lease accounting and lease management but also the business decisions and financial analysis encompassing the lease process. And finally, do not underestimate the benefits that a comprehensive technology solution can provide in meeting all of these challenges.

New Lease Standard – Focus on Executory Costs

One of the areas of the new lease standard that has not received that much attention is executory costs. However, as lessees consummate new leases that must be transitioned into the new standard, this is an area that should not be overlooked.

Executory Costs that Transfer a Good or Service

The new lease standard only covers the accounting for leases. Therefore, any non-lease components that transfer a good or service to the lessee (other than the right to use the asset) and that are contained in the lease payment should generally be accounted for separately. The new standard provides lessees with two options in this instance. From a practical standpoint, the lessee can make an accounting election to account for any non-lease component as part of the lease to which it relates. This election will result in a larger Right to Use (“ROU”) Asset and Lease Liability that must be recognized. Otherwise, the lessee must separate the lease and non-lease components and value each component on a relative stand-alone basis. This approach will result in a smaller ROU Asset and Lease Liability but will require additional effort in determining the relative stand-alone value of each component and the accounting required for each component.

One common example of a non-lease component (good or service) that might be bundled into the contractual payment to the lessor is maintenance services. In the future, lessees should consider contracting separately for services such as these thereby eliminating the need to derive a stand-alone value for the non-lease component.

Executory Costs that do not Transfer a Good or Service

Some executory costs such as payments for property taxes and insurance do not transfer a good or service and, therefore, are not components of the contract. To the extent that the lessee is responsible for some or all of these lessor ownership costs, it is important that the consideration for these costs is structured in the best interest of the lessee

Lessee payments for lessor ownership costs that are structured as fixed payments will be included in the present value calculation of the unpaid lease payments resulting in a larger ROU Asset and Lease Liability. Structuring these types of lessor payments as a direct pass-through of the lessor actual costs will generally categorize them as variable payments and eliminate them from the calculation of the ROU Asset and Lease Liability.

Final Thoughts

The accounting for executory costs under the new lease standard is more complicated than has been the case under previous generally accepted accounting standards. Now is the time to consider these requirements as new lease contracts are negotiated.

 

We at iLease Management LLC believe that the lease technology solution that is selected is a critical element of the transition to the new accounting model. Bringing together all the elements of Lease Analysis, Lease Management and Lease Accounting in one technology solution allows an organization to capture efficiencies that should be a byproduct of new technology adoption. That is why we developed our lease technology solution, iLeasePro. To get more information on the lease accounting change and iLeasePro, please go to our website at http://www.ileasepro.com

 

New Lease Accounting Guidance Issued

The Financial Accounting Standards Board (“FASB”) issued the new lease accounting standard on February 25, 2016.

As it pertains to lessees, the new standard requires that the liability for all leases (except narrowly defined short-term leases) must be recognized on the balance sheet of a lessee at the discounted present value of future lease payments with an offsetting right of use asset. For most leases, the pattern of expense recognition will stay the same although the new accounting model will require more sophisticated financial calculations and will mandate more monitoring and tracking of lease details.

The FASB decided that for public business entities, the final lease standard will be effective for fiscal years beginning after December 31, 2018 (essentially  January 1, 2019) and for nonpublic business entities, the effective date would be for fiscal years beginning after December 15, 2019 (essentially January 1, 2020).

There is a lot to digest in the new standard but here are a few of the issues that we believe management should be considering sooner rather than later.

  • The effective date may seem far into the future but now is the time to organize a Transition Team, if it is not already in place.
  • The FASB allows lessees to early adopt the new standard. Is it better to fast track the adoption of the standard and not wait until the required effective date?
  • Management should pay particular attention to the transition guidance and the practical expedients that are part of transition. Also remember that the standard requires adoption of the new guidance at the beginning of the earliest comparative period presented.
  • The new guidance contains a new definition of what constitutes a lease. Important concepts in the new definition include whether there is an identified asset as part of the arrangement and whether the lessee has the right to control the use of the identified asset. Although most existing leases will meet this definition, some contracts may require additional judgment.
  • As mentioned earlier, calculations of lease liabilities, right to use assets and related amortization will become more complex. Reassessment of initial calculations is required under certain circumstances. And extensive quantitative and qualitative footnote disclosures are required. Management should consider the need to revise policies and procedures and assess whether an enhanced technology solution is required.

Don’t shortcut the process. Start to plan now!

We at iLease Management LLC believe that the lease technology solution that is selected is a critical element of the transition to the new accounting model. Bringing together all the elements of Lease Analysis, Lease Management and Lease Accounting in one technology solution allows an organization to capture efficiencies that should be a byproduct of new technology adoption. That is why we developed our lease technology solution, iLeasePro. To get more information on the lease accounting change and iLeasePro, please go to our website at http://www.ileasepro.com

FASB hoping to issue lease accounting standard by February 29, 2016

The Financial Accounting Standards Board

LEASE ACCOUNTING

Feb. 9: New U.S. lease accounting rules that will leave deep impacts on many companies’ balance sheets are expected to be issued in the last week of February, sources at the Financial Accounting Standards Board told Bloomberg BNA.

FASB hopes to issue the final lease accounting standard after the trustees of the board’s parent group, the Financial Accounting Foundation, meet Feb. 23 and by the end of Feb. 29, the sources said.