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How The New Accounting Rules Apply To Subleases

How the new accounting rules apply to subleases

The new ASC 842 and IFRS 16 lease accounting standards are designed to pull leases from the footnotes and onto the corporate balance sheet in an effort to provide more transparency for investors. For many organizations, mining for lease data throughout the company is a massive undertaking, and lease management is often a decentralized process that lacks standardization. When collecting and classifying lease data, it’s also important to note how the new accounting rules apply to subleases. 

While FASB and IASB diverge on some topics, both agree the intermediate lessor should account for a head lease and a sublease as two separate contracts. For example, if a lessee signs a lease agreement for an entire office building, then subleases one floor of the building to another tenant, the original lease and the sublease will be shown as two different contracts. 

Both FASB and IASB agreed, unless the intermediate lessor recognizes sublease income as revenue and acts as an agent, it should not offset lease income/expenses related to a head lease and a sublease. Along the same lines, it should not offset lease assets/liabilities from a head lease and a sublease that does not meet IFRS and GAAP financial instruments requirements for offsetting.

The Boards differ slightly in lease classification guidance. The FASB decided intermediate lessors should determine the classification of the sublease with reference to the underlying asset. The IASB decided intermediate lessors should classify subleases with reference to the ROU asset from the head lease. Learn more about how CoStar lease administration  software is the smart choice making it easier to do routine Accounting functions with increased accuracy, such as lease classification testing, track workflow and create ad hoc reports.