Don’t Let Lease Accounting Software Catch You Off Balance

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

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 lease data needed and the complexity of calculations for lease accounting have both increased. This applies to initial compliance and ongoing business processes. As a result, the leading practice is to implement an enterprise lease accounting solution.

Many people ask me, “Does the opening right of use (ROU) asset always match the opening lease liability?” The answer is, “Not always.”

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. The lease liability always depends on the net present value of future payments.

Per ASC 842, the ROU asset is based on that lease liability balance. But we need to adjust it 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 the only way to keep the lease cost the same. This is true when moving 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. This allows for seamless transition from ASC 840 to ASC 842 guidelines, without the requirement to re-abstract old data.

The same ideas apply when moving from capital to finance leases under US GAAP. This also applies to changing from operating or finance leases under IAS 17 to the new IFRS 16 rules. Using new data is more efficient than trying to recreate old data from years or even decades ago.

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 arise during the transition to new lease accounting guidelines. One example is the question about the opening balance. Companies that choose a reliable ASC 842 lease accounting software, like CoStar Real Estate Manager, benefit from experience and expertise.

CoStar has helped hundreds of clients set up a solution for managing lease administration and lease accounting. This applies to both equipment and real estate leases. When evaluating lease accounting solutions, make sure ROU asset adjustment functionality is in place and easy to use. Don’t let a software provider fool you - you must have the lease accounting tools you need for easy GAAP compliance.