Don’t Get Caught Off Balance with Lease Accounting

2 min read
October 4, 2019
CoStar Real Estate Manager Blog

Don’t Get Caught Off Balance with Lease Accounting

Does the opening ROU asset always equal the opening lease liability?  Not always.

Many public companies have already successfully adopted new lease accounting guidelines (ASC 842 and IFRS 16). The amount of data required and the complexity of calculations have increased for lease accounting for both initial compliance and ongoing business processes. As a result, the leading practice is to implement an enterprise lease accounting solution.

One of the most common questions that comes up during solution implementation is, “Does the opening right of use (ROU) asset always equal the opening lease liability?” The answer is, “Not always.”

In fact, for companies that have been complying with ASC 840 for operating leases and are now transitioning to ASC 842, the opening ROU asset almost never equals the lease liability. This is due to the fact that the lease liability is always based on the net present value of future payments. Per ASC 842, the ROU asset is based on that lease liability balance, but it needs to be adjusted for certain items. One of those items is the deferred rent balance on the books as of the end of ASC 840. Adjusting the opening ROU asset by that amount is actually the only way to make sure the straight-line or level lease cost remains unchanged when transitioning from ASC 840 to ASC 842. Otherwise, companies have to go back to lease inception and re-abstract years of data just to achieve compliance with the new standard. This is unnecessary and can represent a massive drain on time and resources allocated to the compliance effort. True enterprise class lease accounting solutions offer an automated process, which allows for seamless transition from ASC 840 to ASC 842 guidelines, without the requirement to re-abstract old data.

Similar considerations apply for transitioning from capital to finance leases under US GAAP and from operating or finance leases under IAS 17 to new IFRS 16 guidance. It is more efficient to abstract data going forward than to re-invent the wheel with years or even decades of old data.

Transition is not the only time that the opening ROU asset will not equal the opening lease liability. Other triggers for this to occur going forward may include:
• Direct costs such as commissions
• Lease incentives received at or before lease inception
• Impairment of the ROU asset
• Prepaid or Accrued lease payments

Many issues, such as this opening balance question, come up during the process of transitioning to new lease accounting guidelines. However, companies that take a proven path with a true enterprise-class lease accounting software solution like CoStar Real Estate Manager have experience and expertise on their side. CoStar has helped hundreds of clients implement a solution to manage lease administration and lease accounting for equipment and real estate.

When evaluating lease accounting solutions, make sure ROU asset adjustment functionality is in place and easy to use. Don’t be caught off guard with a software provider that does not offer the functionality needed for smooth and efficient GAAP compliance.