Are you aware that the Financial Accounting Standards Board (FASB) has issued a new accounting standard for operating leases? Under the new lease accounting standard (ASC 842), companies will need to include the majority of their operating leases (i.e. office & IT leases) on their balance sheets from January 1, 2019 onward. For privately held companies, it is effective January 1, 2020.
And while 2019 may seem like a long ways away, publicly traded companies will need to provide the following:
- 3 years of profit and loss statements (2017, 2018 and 2019)
- 2 years of balance sheets (2018 and 2019)
As such, preparation and compliance for ASC 842 starts in 2017.
In terms of preparation, there are many things a company can do. Simple things like centralizing your lease data and inputting into a central database (excel spreadsheets are no longer acceptable) is a great start.
Other less simple things you can do is start learning the fundamentals of ASC 842 and determining the financial impact of existing lease contracts on the balance sheet. Here are some of the questions you will need to answer:
- How do you calculate the asset and associated liability on the balance sheet?
- What is the impact on your Bank Covenants?
- How do landlord allowances impact the calculation?
- Are their good and bad clauses in existing leases that need to be amended?
- What discount rate do we use?
As a frame of reference, a 12k SF office space leased for 5 years at an average annual lease rate of $25 PSF could increase a Company’s assets and liabilities by approximately $1.2MM. Apply this to all your office leases, as well as any office or IT equipment, and the impact to the balance sheet could be substantial.
As a Real Estate professional that is also a CPA, I will be supporting my clients through this conversion and developing strategies for limiting the balance sheet impact of existing and future operating leases.
In the coming week and months, I will be providing additional guidance on the impact of ASC 842 on commercial leases. In the meantime, if you have any specific questions in regards to your company, feel free to contact me directly.