Why You Should Implement the New Lease Accounting Standards Now
Implementing the new lease accounting standards is more complex than many companies realize. For companies with multiple leases in different markets the time to implement is now[i]. Cresa and Swenson, both members of Integra International, a leading accounting association worldwide, created AccountLease™ to provide clients with an end-to-end solution to address the impact on corporate balance sheets.
We recently completed a project for General Finance Corporation (NASDAQ: GFN) in order to comply with the mandates under the SEC’s Staff Accounting Bulletin 74 (Topic 11M). This project, thought to be the first implementation completed, included over 120 leases in the United States, Australia and New Zealand.
GFN is clearly an early adopter of the SAB disclosures required under the SEC regulations and is quite proactive in their continuing efforts to embrace the new lease accounting standards. During that process, several observations as to the practical implementation of such a standard came to light. Don Mitchell and Simon Terry-Lloyd, Managing Principals at Cresa San Diego and Marion Adams, Audit Director at Swenson, who led the Swenson engagement team, have developed a series of observations that are practical considerations for entities considering the new standards:
- A defined strategy and timeline are important.
- More time and effort will be required than most companies contemplate.
- Good project management and planning is paramount.
- Leases are drafted in varying forms because there is no industry standard.
- Leases are often constructed for global entities with a variety of foreign currencies.
- Various sales tax and local taxes need to be addressed.
- Measurement metrics depend on the country of origin.
- Definitions of base rent include such variations as absolute net, triple net, gross, modified gross, full service gross, full service.
- Definitions of square footage measurements vary as to the useable, rentable, rentable with a loss factor, rentable with a core factor, rentable based on drip line, rentable based on ANSI/BOMA Standards.
- Bi-annual increases will need to be considered in some cases.
- The range of utility costs that the lessee is responsible for in relation to their premises and use versus a shared percentage of a “one meter” bill is not uncommon.
- Parking costs and allocations will need to be considered.
- Security deposit and how it is allocated and held are other factors to consider.
- Renewal options and their related structure including relocation rights, termination rights, all and of which can profoundly affect bottom line.
- If upon initial capitalization of a lease it is determined that it is not reasonably certain that the entity will exercise the option to renew the lease, the entity will not include the renewal term in the capitalized term, however, if upon reassessment at the subsequent quarter end date, it is determined that it is reasonably certain that the entity will exercise their option to renew the lease, the entity will need to remeasure the capitalization of that lease.
- For leases denominated in a foreign currency in which the entity has multiple leases the re-measurement exchange rate for the each of these “right of use” assets may be difficult to determine due to the need to use the exchange rate at the commencement of each lease.
- Entities will need to identify all expenses that will be considered initial direct costs so they know what needs to be tracked.
It became obvious to GFN that knowledgeable accountants who understand the new lease accounting rules are only part of the answer. Clearly, a working knowledge of global leasing arrangements are critical to the implementation of these new standards. As the leading, global commercial real estate firm that exclusively represents tenants and occupiers of space, Cresa Global, Inc. was the logical partner to provide real estate expertise.
For public companies, January 1, 2019 is the deadline to be compliant under the new lease accounting standards. With an average lease term of five years, an estimated twenty percent of corporate leases are being negotiated at any time. Therefore it is critically important that corporations enroll an advisor who is an expert in the new lease accounting rules. This will ensure that your finance team is aware of each leases impact to your financial statements.
Simon Terry-Lloyd, Managing Principal
Cresa San Diego
Don Mitchell, Managing Principal
Cresa San Diego
Stephen Austin, Managing Partner, CPA
Swenson Advisors, LLP
Marion Adams, Audit Director, CPA
Swenson Advisors, LLP
[i] Journal of Accountancy: Why lease accounting laggards face serious risks