MWE real estate partner Paul Becht recently sat down with Bloomberg BNA to discuss the new lease accounting standards and how they could effect the real estate industry. His responses were published in two Bloomberg BNA articles and you can find the links here.
October 2, 2017: Will New Accounting Standards Change Companies Behavior? Expert Says, ‘Probably Not.’
Bloomberg BNA: In your article you said that the new lease accounting standard will significantly change the way that leased real estate is reported on financial statements. Can you be a little bit more specific of how the real estate industry will be affected by the new rules?
Becht: The lease accounting rules are going to be effective in 2019. I haven’t heard that lessors are really going to be impacted by the new rules. But for lessee tenants, ASC 842 requires them to recognize a right-of-use (ROU) asset and a lease liability. The lease liability is calculated based on the present value of lease payments to be made over the lease term discounted at the rate implicit in the lease. Therefore, the shorter the lease term is, the smaller amount the lease liability is going to be, the less of an impact the new rules will have on the balance sheets. For example, the present value of lease payments for a two- or three-year lease will be much smaller than for a 10-year lease. Therefore, the impact of a two- or three-year will be much smaller than a 10-year lease on the balance sheets.
October 11, 2017: How Should Auditors Get Ready for the New Lease Accounting Rules?–Get Sufficient Documentation; Question the Assumptions Used
Bloomberg BNA: What do auditors need to focus on when conducting audits under the new lease accounting rules?
Becht: Once the new lease standard is effective, auditors will need to obtain the clients’ inventory and analysis of leases. Depending on the quantity and variety of leases, providing a full inventory and analysis of all leases could be a major undertaking for many companies.
Auditors will need to consider whether their clients have properly included all contracts that fall under the scope of the guidance, correctly separated lease and nonlease components, and accurately recorded the leases on the general ledger. The challenge for auditors will be obtaining sufficient documentation from the client to support the lease accounting.