If you want a successful commercial real estate career, there’s one thing you can’t do, and that’s to not evolve. CRE pros should be striving for continuous improvement in their professional development, business practices and use of technology.
Now that ASC 842 has been in effect for some time, it’s more important than ever to have your lease accounting standards under control. Part of that is being mindful of how liabilities affect your balance sheet. Here are five ways lease liabilities impact your balance sheet.
1. Transparency
ASC 842 took transparency in lease accounting to another level by requiring lessees to recognize lease liabilities on their balance sheets. In the past, operating leases were kept off the balance sheet, but this led to obscured financial obligations. But if you’re recording your lease liabilities properly on your balance sheet, it prominently displays them so stakeholders can gain a clearer understanding of your company’s commitments.
2. Financial Ratios
Whether it’s leverage or debt-to-equity, lease liabilities directly impact your financial ratios—because it adds to the total amount of liabilities. Since lenders and investors use these ratios to assess risk and make decisions, an accurate representation of lease liabilities is crucial if you want to maintain credibility and secure financing in the future.
3. Debt Covenants
When you record your lease liabilities properly, it can trigger violations with debt covenants or even require a renegotiation of terms. This is why it’s so important to record liabilities accurately from the start. Exceeding thresholds set in loan agreements is not ideal, but proactive lease liability management can help you avoid breaching contracts and keep your relationship with creditors a positive one.
4. Valuations
Lease liabilities also have an impact on your company’s value (and its assets). Investors take lease obligations into account and it helps with determining assets’ fair market value. Not reflecting lease liabilities in your balance sheet can lead to misinterpretations and even an undervaluation of the business.
5. Decision Making
Finally, proper balance sheet accounting improves your strategy. The more accurate and transparent your balance sheet is, the more informed your strategic decision making will be. Whether you’re evaluating leases, negotiating terms or assessing financial implications of scaling your portfolio, understanding lease liability practices better will only help you.
If you’re ready to see how Quarem can help you manage and record your lease liabilities better (in compliance with ASC 842 and other lease accounting standards), request a demo today!
