Identifying, and explaining, the nuanced differences between similar items can be difficult. Take peaches and nectarines, for example. Or frogs and toads. But when it comes to our professions at least, we should know all about the important distinctions, similarities and other necessary information in our line of work.
Commercial real estate lease accounting is no different. But there are so many terms and acronyms that it can make your head spin. To give you a refresh, we look at lease accounting differences between lessors and lessees in CRE lease accounting.
Lease Accounting and Lessors
Investopedia defines lessors as “someone who grants a lease to someone else. As such, a lessor is the owner of an asset that is leased under an agreement to a lessee. The lessee makes a one-time payment or a series of periodic payments to the lessor in return for the use of the asset.” As it specifically applies to CRE, the lessor is often the owner of the commercial property and its assets.
Lease Accounting and Lessees
Lessees are on the other side of the coin. Investopedia defines lessees as “a person who rents land or property from a lessor. The lessee is also known as the “tenant” and must uphold specific obligations as defined in the lease agreement and by law. The lease is a legally binding document, and if the lessee violates its terms they could be evicted.” As with lessors, this term is pretty straightforward, but it can be easy to forget or make a mistake if you’re new to the industry, your role, your company, your area or whatever commercial lease accounting software you’re using.
Key Differences Between Lessors And Lessees
So, we’ve established the definitions, but how are these two terms really different, other than defining CRE pros like yourself and their tenants? The differences in lease accounting are bigger than they appear and the most important are related to lease accounting standards like ASC 842, IFRS 16 and GASB 87. Here are the key differences for these three standards:
- With ASC 842, leases must be recorded on the balance sheet. Also, lessees must classify leases as operating/finance and lessors must classify them as operating, financing or sales-type.
- With IFRS 16, lease accounting has a more simplified approach where there are still financial and operating lease classifications, but they’re accounted for on the balance sheet as assets and liabilities instead of separate lease types.
- With GASB 87, it’s also a simplified, single-model approach for government entities, but the leases and related assets must include a date based on the commencement or transition to GASB 87.
Like peaches and nectarines, the lease accounting differences between lessors and lessees are nuanced yet important. If you’d like to learn more about the lease accounting differences between lessors and lessees—and how the right CRE software can help—request a demo of Quarem today.