COVID-19 and Lease Accounting Teams with CoStar
by Matt Waters, CPA on March 19, 2020
The coronavirus pandemic (COVID-19) has impacted accounting teams, and life in general, in many ways. The impact to financial statements will be widespread and financial results based on new lease accounting standards will be no exception. In fact, COVID-19 will almost certainly impact lease accounting calculations in several key areas, including:
Discount Rate (IBR) Changes – Rates have dropped as regulators respond to COVID-19. Lower interest rates result in an increase to the calculated amount of new Right of Use Assets and Lease Liabilities. This is primarily a concern for companies entering new leases, re-measuring leases, and especially for companies currently transitioning to new lease accounting guidance. CoStar offers multiple options for entering the IBR for lease accounting calculations, and robust reporting to help estimate the impact.
Fair Values – Commercial real estate values may be impacted by a significant event such as COVID-19. CoStar is the leading provider of commercial real estate data. In fact, for years the fair market value (FMV) amounts required for lease accounting calculations have been pulled from CoStar as companies perform lease accounting tests (under old and new guidance). The process usually looked something like this:
Request for FMV from Accounting -> Real Estate Department -> Real Estate Broker -> Broker looks up in CoStar -> Real Estate Department -> Returned FMV to Accounting
Now, with a lease accounting feature exclusively available through CoStar, the accounting department can have access to the same FMV data that real estate brokers rely on. This can cut days out of the process of obtaining this key variable.
Impairment – As business is impacted by COVID-19, impairment of ROU assets is a possibility. ASC 842 requires a different amortization pattern after the impairment of an operating ROU asset. CoStar has automated the process of recording lease related impairments including journal entries for the balance sheet and P&L impact, as well as the revision to the amortization table.
Partial Termination – The impact of COVID-19 could result in scaled back operations in some locations. ASC 842 provides specific guidance and two options for recording a modification that reduces the scope of the lease. CoStar has an automated re-measurement workflow for partial termination events, allowing for calculations under both methods presented in ASC 842. This includes, workflow triggering the re-measurement, functionality for the required ROU Asset adjustment, and automatic JEs for the resulting impact on the general ledger.
Abandonment – If an asset is no longer going to be used by the business at all, there may be an option for a full termination under the lease. This situation could also result in an abandonment of the asset, where the lessee still has a liability to make lease payments. Regardless of the scenario, CoStar is equipped to record the lease accounting impact. CoStar’s functionality for this, and all major lease events, stretches from abstract to audit. In other words, CoStar features support every step of the process up to and including automating common audit request that are prepared by the client (PBC). One example of a PBC report available in CoStar is the Roll-Forward report, which presents ROU Asset and Lease Liability balances and changes in a format commonly requested by auditors.
Reassessment – The impacts of COVID-19 could trigger the need to reassess key assumptions associated with lease accounting calculations, including term and purchase or termination option assumptions. CoStar is equipped to recalculate amortization schedules and automate the flow of the financial information all the way through the process. Rest assured, when a key variable changes in CoStar, the automated workflow will trigger reevaluation of the accounting schedule. If the accounting schedule changes, the impact will be reflected in journal entries and also in all key reports, including the disclosure report. Of course, the flow of information through CoStar to support reassessment is fully traceable and auditable.
Information Delay – Information is key to decisions, and lease accounting is no exception. Many times, key information required for lease accounting calculations is received after month-end close. COVID-19 may present unique challenges that will delay the flow of information into the accounting department. CoStar offers robust retrospective re-measurement functionality. This means that after entries are posted for a period, CoStar will not allow a JE to impact that closed accounting period. Based on the dates of an adjustment, CoStar will automatically calculate the true-up required and post the impact to the GL in the current period.
|Discount Rate (IBR) Changes
|Multiple options for entering IBR, including automation
|CoStar is the leading provider of commercial real estate data
|Automated impairment functionality, including JEs and revised amortization tables
|Re-measurement workflow for partial termination events, including both methods in ASC 842
|Abandonment (Full Termination or Impairment)
|Automated process and workflow, including gain/loss JEs and roll-forward report impact
|Comprehensive re-measurement functionality, including accounting for a change in assumptions
|Retrospective Re-measurements (true-up entries)
CoStar is prepared to keep critical lease accounting compliance projects moving forward. We are committed to the health and safety of our 4,500 fully remote-enabled employees, who can help companies evaluate, test and fully implement any of CoStar’s solutions 100% remotely. We have already executed a Business Continuity Plan without disruption of contractual commitments. Plus we have substantial liquidity and resources for uninterrupted service and support.
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