We’ve covered the impact of lease accounting standard changes like the FASB and ASC on this blog before, but we haven’t really discussed the rules that have come as a result of these changes. This is especially important in light of the fact many companies must be compliant by January 2021. These lease accounting rules not only impact several different commercial real estate roles and processes, but they do so in different ways.
Let’s go over some of the most important lease accounting rules and discuss why they’re so important for commercial real estate professionals.
1. Keep the Balance Sheet In Compliance
Your assets and your liabilities are the most important elements of the balance sheet. If the rent represents most or all of an asset’s fair market value, it could change the way the lease is categorized. To keep the balance sheet in compliance, you must recognize assets properly, asset values and how payments are made over the lease term.
2. Keep the Income Statement In Compliance
Just as important is the income statement. This list of revenues and expenses dictates your profit and loss amounts, after all. New compliance standards require that income statements be included under financing activities and are placed in the appropriate spot on the lease term.
3. Know Your Lease Types
Gone are the days when leases are classified as “capital” or “operating.” Instead, you either have Type A or Type B leases. Type A leases are basically leases that are sold or financed, in addition to other qualifications. Type B leases are operating leases. Knowing what type each of your leases is will dictate how you treat it for commercial lease accounting purposes.
4. Set Lease Terms Appropriately
Long-term or short-term? It’s even more important with the new standards updates. According to the National Association of Realtors (NAR), “the longer the lease term, the greater the up-front future lease payment liability a lessee must record on its balance sheet. Therefore, owners/landlords can expect lessees to ask for shorter lease terms and more renewal options.”
5. Maintain Proper Tax Treatment of Leases
Finally, make sure your lease accounting practices are checking all the boxes when it comes to tax season. If you’re maintaining compliance via the new standards, you’ll have nothing to worry about. But if you’ve delayed making accounting changes (like developing in-compliance methods of adding values to your balance sheet, for example), you’ll be under tremendous pressure to account properly for tax statements.
If you’re interested in seeing how lease accounting software like Quarem can help you stay up to date with rules and processes, request a demo today.