The more things change, the more things… well, change. This is true for commercial real estate at least when it comes to lease accounting standards and liabilities. After ASC 842, it became the lessee’s obligation to make lease payments.
This was just one of many changes and one that affected right of use assets in particular. Here’s what you need to know about right of use when it comes to FASB and your portfolio.
What Is ‘Right of Use?’
Technically known as “right of use asset,” this term refers to an asset that a lessee has rights to in a leased property, item or equipment. This “right of use” applies to the entire span of the lease’s term. The Broker List defines “right of use” this way:
“The Right of Use Asset, or ROU Asset, is an asset that represents a lessee’s right to to operate, hold, or occupy a leased property, item, or piece of equipment for the lease term. It is calculated as the initial amount of the lease liability, plus lease payments made before lease commencement, plus initial direct costs, less any lease incentives. Similar to the lease liability, the initial right of use asset calculation for operating leases is identical to that of finance leases.”
Right of Use Assets and ASC 842
FASB ASC 840 established that there didn’t need to be a lease asset or liability anywhere on the balance sheet, but things changed slightly with ASC 842. With the latter, the 75 percent and 90 percent of FMV rules were no longer the definitive rules for ROU assets. Secondly, the lessee is able to exercise options to purchase the asset. Then, if the lease is specialized in some way (and has potential value in the future), this must be considered in lease accounting practices and reports.
Managing FASB Standards with CRE Software
As with many industry changes “right of use” is a fairly simple concept that can get overcomplicated in a hurry, especially if you have a large (or more than one) portfolio. The good news is that commercial real estate software can make managing these updates easier. With Quarem’s ASC 842 and IFRS 16 features, for example, you can easily maintain compliance with features like:
- Onboarding and lease accounting setup help
- Easy-to-use interface with guides
- Access to industry experts for tool maximization
- Robust expense scheduling capabilities
- Capturing of all required metrics and data points
- Customizable, easy-to-use reporting
- Cloud-based, secure documentation
- Variation control and collaboration features
If you’d like to know more about how commercial real estate software can help you manage right of use and other contractual elements impacted by FASB updates, request a demo of Quarem today.