Office or home? No one has answered the question yet. But while they figure it out, many companies are rearranging their portfolios by abandoning or terminating leases. According to CBRE, 58% of large companies (10,000+ employees) are planning to downsize their real estate portfolios. 

"Two of the more relevant questions that continue to be asked [are] where will our employees work? And to what extent will the company's future strategy rely on brick-and-mortar real estate?" said Tim Kolber, Managing Director of Accounting and Reporting Advisory Services at Deloitte

Some of the most challenging tasks for lease accountants are lease abandonments, lease impairments and lease terminations. Each of these situations requires unique lease accounting solutions. To work through them, accounting teams need a high level of expertise and reliable ASC 842 software.

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Lease abandonments 

What is a lease abandonment? 

Lease abandonment happens when a tenant leaves a rented property before the lease ends and does not plan to return.

Several factors could drive this decision. A global pandemic comes to mind. Other examples include business closures, relocation or a strategic decision to downsize. 

The lease accountant's role: 

Lease accountants must carefully assess the financial implications of an abandoned lease. Key tasks include: 

• Identifying abandonment indicators: Lease accountants use lease accounting software to monitor leases for signs of abandonment, such as ceased operations at the premises or non-payment of rent. 
  
  
• Determining financial impact: Lease accountants calculate the impact of abandonment on the company’s financials. This often involves recognizing a loss on the abandoned lease asset, remeasuring lease liabilities and derecognizing any related right-of-use (ROU) assets. 
  
  
• Adjusting the balance sheet: Once abandonment is confirmed, the lease accountant will adjust the lease liabilities and ROU assets on the balance sheet. If the asset is impaired, this will also need to be accounted for. 
  
  
• Disclosures: In accordance with IFRS 16 and ASC 842 compliance, the lease accountant must ensure that the appropriate disclosures are made in the financial statements. The audit trail must include details on the nature and financial impact of the abandonment. 

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Lease impairments 

What is a lease impairment? 

A lease impairment occurs when the value of a leased asset has declined significantly below its carrying amount. This can result from changes in market conditions, physical damage to the property or economic shifts that affect the value of the lease. 

The lease accountant's role: 

Lease impairments require careful evaluation, and the lease accountant's responsibilities include: 

• Assessing triggering events: Lease accountants must be vigilant for indicators that a lease asset might be impaired. This could include a decline in the economic benefits of the leased property or unfavorable changes in the business environment. 
  
  
• Valuation of the asset: If impairment is suspected, the lease accountant will need to revalue the ROU asset. This involves determining the fair value of the asset, typically through discounted cash flow methods or market comparisons. 
  
  
• Recording impairment losses: If the carrying amount of the ROU asset exceeds its fair value, the lease accountant records an impairment loss in the financial statements. This loss reduces both the ROU asset and the company's equity. 
  
  
• Updating future lease expenses: After an impairment, the lease accountant must adjust future amortization and interest expenses on the ROU asset to reflect its impaired value. This requires ongoing monitoring and adjustments as market conditions or asset values change. 
  
  
• Financial reporting and disclosures: Proper disclosure of impairment events and their financial impacts is critical. Lease accountants ensure these are accurately represented in accordance with GAAP or IFRS standards so there are no hiccups during the audit process. 

Lease terminations 

What is a lease termination? 

Lease termination occurs when a lease is ended before the expiration date. This happens either through mutual agreement, a default or the exercise of a termination clause in the lease agreement. 

The lease accountant's role: 

Lease terminations require significant financial adjustments for both finance and operating leases. The lease accountant's responsibilities include: 

• Reviewing the termination terms: Lease accountants must understand the termination terms of the lease contract to ensure the financial implications are accurately recorded. This includes assessing any penalties or costs associated with the termination. 
  
  
• Derecognition of lease assets and liabilities: Upon termination, the lease accountant will derecognize the ROU asset and lease liability from the balance sheet. Any difference between these amounts and any termination fees must be recorded as a gain or loss. 
  
  
• Settlement accounting: If the termination involves settlement payments, the lease accountant must record these payments and ensure they are reflected in the financial statements. 
  
  
• Disclosure requirements: Lease terminations often have significant impacts on the financial statements. Lease accountants are responsible for ensuring the company provides clear disclosures regarding the nature of the termination, the financial impact and any future commitments related to the termination. 

Lease accountants play a critical role in managing the financial complexities of lease abandonments, impairments and terminations. Their expertise ensures that these events are accurately reflected in the company’s lease data, mitigating risk and ensuring compliance with accounting standards.

But human error is still a risk. Lease accounting software solutions like CoStar Real Estate Manager can ensure that your data is accurate, auditable and in compliance. 

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The combination of the lease accountant alongside a strong lease accounting tool are more important than ever in maintaining financial integrity and transparency. 

By understanding the intricacies of these processes, lease accountants help businesses make informed decisions, manage risks and maintain compliance with lease accounting standards, making their role indispensable in modern lease management.