Retailers, wholesalers and distributors who typically have a large number of operating leases, will be significantly impacted by the new ASC 842 lease accounting standard. Retail companies lease a variety of assets, ranging from real estate to manufacturing equipment. Sometimes, retailers even also act as lessors. Here is a brief overview of how the retail industry will be affected by the new lease accounting standards.
It is easy to overlook potentially embedded leases that now must appear on-balance sheet. Leases can include everything from real estate leases for individual stores and distribution centers to vehicle leases, IT systems and office equipment leases. Service or supply contracts could also include embedded leases on property, plant, and equipment.
Retail companies lease a diverse range of assets from buildings to manufacturing equipment and sometimes retailers also act as lessors. A retailer’s supply contract may require a dedicated factory for production. According to the new standards that factory may need to appear on the retailer’s balance sheet as a leased asset. A retailer with a dedicated facility under contract as a third party to fulfil online orders might need to account for that facility as a leased asset.
Many mall retail locations have lease contracts with terms that automatically change under certain circumstances. A monthly lease payment for a retail location might switch from a fixed amount to a percentage of sales if the mall loses an anchor tenant. Retailers must identify modified contracts, and then figure out how to include the modification on their balance sheets.
Including more lease assets on the balance sheet could significantly increase the cash flows needed to recover those assets. Retailers will need to understand how the new lease standard will affect their required impairment tests for individual store locations.
The footprint of physical locations and leases for wholesale and distribution centers is typically much smaller than for retail businesses. The impact of this new standard will be felt, and it may be on a smaller scale. This new lease accounting standard is the most significant accounting change in more than a decade. Implementing Costar’s proven lease management software will assist with sorting out the difficult decisions necessary to ensure continued growth in business and at the same time meet compliance standards. It would be best if you had a plan to become compliant soon and implementing CoStar lease management software is your critical path to success.