(Newswire.net — August 12, 2021) — The pandemic has seen the world economy change its ebb and flow significantly. Thanks to elements creating a “new normal,” certain agreements may need to be revisited. Lease agreements are one of these contract types that may need to be reconsidered in this new environment. The Financial Accounting Standards Board (FASB) released new guidelines for accounting known as ASC 842. This new guidance for lease accounting has been pushed back thanks to the pandemic. CPA Journal notes that private businesses and nonprofits have until December 2021 to comply with the standards. However, companies have to juggle the demands of ASC 842 alongside other financial considerations. Lease renegotiations have bounced back. Many businesses are seeing lease renegotiations with better terms, thanks to the uncertainty within the economy.
How COVID-19 Affects The Lease Accounting Standard
Compliance with ASC 842 and lease accounting alongside that standard may be affected by the ability to collect rents and pay rents. Contractors may be forced to adjust how they treat rent concessions. The Federal Reserve has lowered the interest rates thanks to the pandemic’s impact on the economy. The newest leasing standards require the contractor to use either the incremental borrowing rate (IBR) or the interest rate that’s stated within the lease. The lowered interest rate impacts the calculated amount of a lessee’s right-of-use assets and leases liabilities and you can find more information here. This result also affects the IBR, and a business must compensate on their balance sheet.
Property and asset values may also see a significant impact thanks to the pandemic. ASC 842 states that companies need to compare their present net worth of lease payments to the fair value of the property if they are to meet the standard’s lease classification tests. Unfortunately, the pandemic complicates compliance in this sense as well. It may be nearly impossible to find comparables to meet the standard set forth by ASC 842.
Updated Compliance Incoming?
With these glaring issues in the standards for compliance, how are businesses coping? Especially when the deadline for submission is approaching so quickly. Boards such as the FASB and the International Accounting Standards Board (IASB) have continued to meet throughout the pandemic. Their meetings have focused on the impact that transition will have on businesses and dealing with the hurdles that compliance presents. The IASB amended one of its lease standards to overlook assessing whether a rent concession due to COVID-19 is a lease modification or not. The FASB took this under consideration and also modified its own guidelines to suit. This change isn’t the only one that’s likely to happen.
The FASB is currently undertaking its post-implementation review. The idea is that, with this review, the FASB will be able to adjust its compliance guidelines. One topic that stands out in this review process is lease modification accounting guidelines. ASC 842 requires that if a lease is modified, the classification of the said lease must be reassessed. The reassessment would also take into account remeasuring the lease liability. In essence, this means that the work needs to be done twice for the same lease.
October 2020 saw the FASB amending its guidelines on partial terminations in a few special situations. However, the decision drew widespread criticism from stakeholders. The fallout was that the FASB was advised to consider incremental updates. In February 2021, the FASB delayed issuing any new amendments until they undertook a comprehensive review of the guidance for lease modifications. Since there aren’t any forthcoming guidance updates, businesses are left in limbo. Should they invest time and effort into complying with ASC 842? Or should they wait for the modified guidelines to be released?
The FASB may add some clarity to their compliance rules, but there’s no guarantee that they will make the process easier. The onus rests on companies to communicate with the FASB or at least be aware of guidelines as they are released. Ideally, a team should be tasked with checking the FASB’s website for updates every so often. Once changes to the policies are introduced, businesses may need every working minute to ensure that their companies are compliant with them.
Added Complications to Audits
Accounting teams may face significant challenges in dealing with the increased volume of early termination. With businesses realizing they do not need to maintain leases for commercial property, these assets are seeing terminations at a tremendous rate. Early terminations, of course, complicate accounting. The rules for instituting these changes while being compliant can be complex. Having lines of communication open to lease negotiation departments allows accounting departments to better grasp the details of these terminations. Auditors and accountants need to liaise to ensure everyone is on the same page. Interim testing from auditors can ensure that accountants are conforming to the rules. Regular testing also guarantees that there aren’t any end-of-year surprises for either department to deal with.
Reporting Short-Term Leases
Defining short-term leases has also changed. ASC 842 doesn’t require businesses to report leases less than twelve months since they count as short-term leases. The temptation to switch over to short-term leasing is a powerful one for businesses. Unfortunately, ASC 842 has a provision that prevents this. Even if a lease is a 12-month holding, with the option for renewal, it can’t be considered short-term since the business must consider its reasonably certain holding period. Even though short-term leases don’t need to be explicitly reported, ASC 842 stipulates that expenses related to short-term leases must be included in the financial report footnotes. These regulations mean that short-term leases don’t really offer much in terms of benefits.
The pandemic will continue for a while, and businesses will have to adapt to the changes around them. Accounting already has a lot of new and exciting additions to compliance and regulation. Knowing these guidelines (and their modifications) is necessary if a business wants to achieve compliance. Communication between accounting departments and auditors can ease the issues that might arise. While it might seem tempting to simply look at short-term leases as a solution, their benefits aren’t as profound as they seem at first glance. Computing with ASC 842 is the first step to understanding lease accounting in a post-pandemic world.