Tips for lease accounting amid financial uncertainty

Written by promotiondept

May 13, 2021

Tips for lease accounting amid financial uncertainty

It’s been more than a year since the pandemic began, and while the vaccine rollout is reason for optimism, many organizations will be dealing with financial fallout for the foreseeable future. While private es and notforprofit organizations face mounting financial pressures, many are also still contending with the adoption of new guince for lease accounting. And public companies that have al adopted the new guince need to ensure they’re applying it correctly amid a sharp increase in lease renegotions.

The new FASB and International Accounting Stanrds Board (IASB) lease accounting stanrds require that organizations recognize s and liabilities for leases with lease terms of more than 12 months, a significant undertaking even for fully staffed teams. For organizations that were forced to downsize due to the economic downturn, manng the transition and ongoing compliance can be even more unting.

Throughout the pandemic, the boards have continued to meet to evaluate the impact of the transition, release new uptes, and address compliance hurdles. For instance, the IASB amended its lease stanrd to provide an optional practical expedient that allows lessees to forgo assessing whether a rent concession related to COVID19 is a lease modification, which FASB mirrored with similar guince.

Since FASB is currently in its postimplementation review process, there’s still a chance that more changes are forthcoming. One ic the board is actively focused on is lease modification accounting. Under FASB ASC ic 842, Leases, when a lease is modified, its classification must be reassessed and the lease liability must be remeasured, which practically doubles the amount of work needed to account for a single lease. In October of last year, FASB proposed an amendment providing relief for parl terminations in some situations. However, the board received feedback from stakeholders expressing the need to consider additional changes and concern about releasing uptes in increments, leading to a decision in February of this year to delay issuing any new amendments until it has done a more comprehensive review of the lease modifications guince. For now, that leaves the timing of any new amendments in flux.

It’s worth noting that while FASB may add clarity to the rules, it may not make the transition easier.

It’s important to stay on of the communications from FASB, and the board makes it easy to do so. As part of the transition, companies should carve out time to check the website or review email uptes to make sure they’re aware of changes and can incorporate them as soon as possible.

The pandemic has inited a major shift in the number of employees working remotely, and lease negotions are occurring frequently, particularly for real estate. These negotions can have a significant impact on the audit process for public companies. Many organizations are making modifications, requesting concessions, and terminating leases early for the first time or at a higher volume than ever before. The new rules for these lease changes are complex and can be a significant burden for accounting teams to address. Because accounting departments typically aren’t involved in the lease negotion process, it’s also important to keep lines of communication open with lease managers while those conversations are in progress.

Accountants need to make sure they’re on the same page with their auditors as they make these changes and that all parties have a full understanding of what the new rules require. Early, constant communication with auditors is vital to ing surprises at year end. One simple way auditors can roadblocks is by performing interim testing. For example, if a company has a Dec. 31 year end, perform detail testing as of Sept. 30. By performing testing earlier, auditors will have more time to address client questions and challenges before final reporting deadlines.

With all the uncertainty around the impact of remote work on commercial office space, some real estate and landlords reported an uptick in interest in shortterm leases. And since ic 842 doesn’t require companies to report leases with terms shorter than 12 months, shortterm leasing may seem like an appealing strategy on the surface. But the accounting impact is actually more complex.

Even if a lease appears to be a shortterm lease, terms in the new guince state that companies have to consider their reasonably certain holding period. A 12month lease with renewal options, or that is highly unlikely to be replaced at the end of its term (such as a warehouse that has been modified to suit a particular company’s logistics infrastructure), may not meet the definition of a shortterm lease.

ic 842 also requires that companies disclose how much of their lease expense relates specifically to shortterm leases in the footnotes of their . That could add complexity to the accounting, since companies need to segregate those expenses from the total, which might require the use of multiple general ledger accounts. Because of these rules, shortterm leases don’t offer the automatic benefits that they may appear to on the surface.

The financial pressures of the pandemic will continue to disrupt lease arrangements for some time. To address the complexities of transitioning to the new stanrd and accommoting uptes as they’re released, accounting teams should maintain clear lines of communication with lease managers and their auditors. Lease accounting tools can aid in that communication by centralizing lease documents and easing reporting. By working collaboratively and proactively, organizations can minimize transition hurdles and pivot as financial situations continue to change.

Sarah O’Sullivan, CPA, is accounting director at lease accounting software provider LeaseQuery. To comment on this article or to suggest an idea for another article, contact Ken Tysiac, the JofA’s editorial director, at Kenneth.Tysiac@aicpa-cima.com.


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