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Frozen Lease Accounting – Continued Use Of Straight-line Functionality

Frozen Lease Accounting – Continued Use of Straight-line Functionality

New lease accounting guidelines (ASC 842 and IFRS 16) are now in effect for many companies.  I am often asked if CoStar is planning to retire “old” lease accounting straight-line functionality, which was required under ASC 840 and IAS 17.  The answer is absolutely not!

Many companies still need the flexibility to perform straight-line calculations.  Reasons to continue straight-line include:

  • Parallel reporting during the transition period to new accounting guidelines.
  • Frozen GAAP provisions – Some lenders have provisions in debt covenants that require accounting to be reported under the rules in effect at the inception of the loan agreement.  As time goes by these may become less frequent, however many companies are required to comply as of adoption of the new standards.
  • Statutory reporting – some industries have statutory requirements in addition to GAAP.  An example is the insurance industry.  Many insurance companies produce financial statements under US GAAP and under requirements of the NAIC (National Association of Insurance Commissioners).  Straight-line rent may still be the requirement for statutory reporting.
  • Local GAAP – Some countries/jurisdictions have not transitioned to ASC 842/IFRS 16 and continue to require straight-line treatment of lease expenses.  Some clients have discussed using straight-line functionality for local GAAP requirements in Japan, Hong Kong, Australia, Germany, and various other jurisdictions.
  • Short term leases (less than 12 months) – the new accounting standards allow companies to opt out of recording lease liabilities and right of use assets for short term leases as a practical expedient.  However, to the extent that rent for short term leases is not already level over the lease term, lessees need to record the rent on a straight-line basis.
  • Other purposes – Straight-line functionality is useful anytime an item needs to be accounted for evenly over a period of time.  A system based, automated method of calculating and recording straight-line entries is a useful and flexible alternative to manual calculations.

While the majority of lease related accounting entries will fall under the new guidelines in ASC 842 and IFRS 16, there remain quite a few scenarios that will still require the use of straight-line accounting calculations.  CoStar has been performing calculations under ASC 840 and IAS 17 for years for both equipment and real estate leases, and we will continue to support straight-line calculation functionality in addition to our robust suite of tools to handle new lease accounting calculations.

Matt Waters, CPA

Lease Accounting Subject Matter Expert with over 15 years of Management Experience in Accounting and Finance