The implementation of ASC 842 caused many businesses to become more aware of the obligations they have with leases. With this new right of use asset and lease liability being present on the balance sheet, it is important for companies to be organized so they can update their asset and liability accordingly. Through my experiences with working with various clients in different fields, there are best practices that can be implemented to be organized and save time.

Knowing your commencement date

One of the most crucial aspects of leases is having a complete list of all leases and the respective commencement and end dates. The term commencement date may vary for each lease. Some lease agreements will state the commencement date on which operations within a facility began, when the asset being leased has been delivered, or when the first payment has been made. When acquiring a lease, it is important to know the period in which rent is paid and if any abatement periods are stated.

Extensions

The end of the lease should have all extensions detailed for which the lessee is certain to take. Many leases will have rent escalations within its extension terms. Therefore, it is important to keep a detailed summary of all leases held. The length of the lease, after factoring extension terms that are certain to be exercised, will determine the interest rates used to calculate the right of use asset and liability. A five-year lease with three extension terms of five years now becomes a twenty-year lease and the interest rates used must be reflective of that term. Extension terms can be found in exhibit sections of leases or in fixed monthly rent terms within the lease.

Variable costs

Property leases generally have commercial area maintenance (CAMs) and other variable costs associated with fixed monthly rent. To ensure proper recognition and disclosure of these costs, a separate schedule should be maintained. Non-lease components, such as real estate taxes, should also be tracked separately to ensure proper accounting and disclosure.

Clauses

A lease must meet the requirements of a contract under the accounting standards to be considered a lease under ASC 842. If one party to the lease can terminate the lease without any significant monetary repercussions, then there is no contract in place. Furthermore, some clauses include stipulations regarding if a lessee intends to terminate. If the lessee can notify the other party within a specified period of less than a year, the lease could be considered a short-term lease under ASC 842.

Life with ASC 842

With this new asset and liability on the balance sheet, organization is crucial. Maintaining separate schedules, identifying extensions, variable costs and clauses will allow for the accounting of each account to be done efficiently. If information is organized correctly with current and new leases, life with ASC 842 will be an easy adjustment.

For more information on leases and the implementation of ASC 842, reach out to Matthew Bruno at mabruno@citrincooperman.com.