Lucernex Real Estate Solutions Strategist, Mike Hammerslag, MS(RE), MBA, CPM® (see Mike’s management summary here) has been keeping close tabs on the upcoming FASB guideline changes for retail leases and provides this update.
ONE Model with THREE Approaches!
There has been some significant progress this summer and I am happy to report that final adopted regulations in less than ten (10) months would not be a surprise!
But we still have to get there from here. And where are we you ask? The simple facts are.
The Model:
- The overall governance of leases will fall under the right-of-use model.
The Approaches:
- If the lease is under one (1) year it does not need to be recognized on the balance sheet.
- If the lease DOES NOT “consume” the underlying asset then it may be accounted for on a straight-line basis.
- If the lease DOES “consume” the underlying asset then it will be accounted for under an approach which results in a front-loading of the leases expense, similar to the exposure draft of 2010.
The Impacts:
- Leases under one (1) year need not be recognized and hence the concept of pop-up stores or other very short real estate tenancies is a non-issue and they will not make it to the balance sheet.
- Perhaps as high as 90% of all real estate leases, longer than one (1) year, will be accounted for on a straight-line basis and be recognized on the balance sheet.
- Traditional equipment leases and a certain group of real estate leases will “consume more than an insignificant portion of the underlying asset” and hence will be recognized in a method that results in the front-loading of the lease expense and recognition on the balance sheet.
The Implications:
- Tests will be necessary to justify how a lease was accounted for;
- Those tests will become part of the leases permanent record; and
- Accounting can potentially become more technical and multi-faceted.
The result of the items mentioned above is that systems will need to be developed around a commitment to flexibility of design and delivery. A lease administration system will have to contain and report on all lease types, whether they are or are not recognized on the balance sheet. This means that no less than three (3) different and distinct methodologies and supporting schedules will have to be maintained at all times.
Lastly, the topic of early adoption has pleasantly come to the surface again and would, I believe, be a welcome option for firms. And while good news is always welcome, the lack of finality means that the devil will be in the details of the next ED expected this fall.
Shameless Plug
Lucernex has been on top of the upcoming FASB changes from the very beginning with members of our staff staying abreast of every phase of the board actions. Lx Contracts, the Lease Administration and Rent Accounting Module of Lx Retail, was the FIRST product updated to meet the expected standards back in late 2010 with an update to our FASB financial engine and Lucernex continues to update the product with each release as the eventual rules become more and more clear.
Lucernex has been recognized as the leader in transitioning retailers from legacy lease administration systems to our market leading cloud based lease administration solution, Lx Contracts. Learn more about our Legacy Lease Administration Upgrade Program.
