In February, 2016, the Financial Accounting Standards Board (FASB) issued a new standard that requires tenants to recognize most rental contracts on their balance sheets. This is a significant change from the existing standard for lease accounting. The new standard is effective for interim and annual reporting periods beginning on or after December 15, 2018 for publicly traded companies and December 15, 2019 for all other companies. Companies may adopt the standard earlier, but must also adopt the new revenue recognition standard as well.
Because leases will be recorded as Right-of-Use Assets and Liabilities on the balance sheet, companies should consider the impact on related financial ratios. This may have an impact on debt covenants. Additionally, depending on the way the lease is structured, it may also have an impact on EBITDA.
All leases will need to be evaluated and recalculated which will require a significant time commitment from internal or external resources.
Significant changes in identifying the restated financial statement impact as well as the ongoing changes from straight-line rent expense to the newright-of-use concept.
Impact on debt covenants may be significant.
Companies may consider purchasing real estate vs. leasing real estate due to the loss of off–balance sheet accounting. Do you have the right resources identified to assist in the evaluation of new transactions and the related impact on the financial statements?
As the demand for information to support the new accounting rules increases, efficiencies will be derived from having a database system in place to efficiently process ongoing entries as well as changes in assumptions which impact the financial statements. IT will be involved in analyzing new systems.
Is your company prepared for the impact these changes will cause? The following questions will help you decide where your company stands with respect to proposed changes to lease accounting standards.
DO YOU HAVE THE DATA AVAILABLE TO PREPARE THESE NEW LEASE ACCOUNTING ENTRIES?
DO YOU HAVE THE PROCESSES DESIGNED TO CONTINUALLY UPDATE THIS INFORMATION?
E Smith Realty Partner’s Lease Administration team understands the value of a well negotiated lease. As an outsourced partner, our lease administration professionals work tirelessly to ensure your lease agreements are adhered to by the landlord. Our team members have performed lease administration for clients in retail, industrial, o ce, restaurant, and healthcare. Our team can is agnostic in database solutions. When E Smith Realty Partners centralizes your lease information, you will have complete con dence in the accuracy of data to strategically run your business.
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E Smith Realty Partners is a premier commercial real estate services company representing national clients.
The company is built on the standards embodied by our team: integrity, excellence and making a positive impact in the communities we touch. E Smith Realty Partners leverages many years of collective real estate development, investment, brokerage, design and construction expertise into building a world-class services company.