If there’s one organization commercial real estate professionals should regularly monitor, it’s The Financial Accounting Standards Board (FASB). The guidelines administered by this organization have real, worldwide impact on how CRE pros handle commercial leases.
One of their recent updates addresses Accounting Standards Codification (ASC) 842–specifically how companies handle discount rate calculations, which can be complex. Let’s cover some of the basics about these discounts.
What Are ASC Discount Rates?
For several years now, all long-term commercial leases must be recorded on balance sheets. Determining the initial value for these balance sheets can be a bit complex, however, when discount rates are involved. Future cash flows are discounted based on present values, meaning it’s important to ensure your ASC discount rates are accurate. The three scenarios that are usually appropriate for these discount rates are borrow rates, implicit rates in the lease and risk-free rates for non-public entities.
How Companies Address ASC Discount Rates
ASC 842 discounts can be complex and frustrating, especially for private companies and nonprofits. But the latest updates have made the process a little easier, as businesses can now apply risk-free discounts based on assets instead of entities. Your organization may elect to institute a policy of risk-free discounts for all leases, saving you time and money. Either way, addressing these discount rates properly requires knowledge and the right technology. But the process is easier than it’s been in the past.
Accounting for Updates with CRE Software
Commercial real estate (CRE) software can make these discount rates even easier to manage and understand. With Quarem, for example, you can view and/or automate discount-related information like disclosures, compliance reports and any notes for your leases. Whether you’re looking to apply ASC 842 discounts rates to individual assets or for your entity as a whole, Quarem’s team can advise and offer recommendations on how to use the tool properly, especially when it comes to lease accounting standards.
If you’d like to see for yourself how Quarem can help with ASC 842 guidance, FASB updates and more, request a demo today!