In 2016, the Financial Accounting Standards Board (FASB) released a significant pronouncement related to the accounting for leases. This change applies to nonpublic business entities beginning in 2020 and will have a major impact on commercial tenants including retailers.
Under current rules, real estate leases are not reported on the balance sheet. Consequently, leases are not treated as assets or liabilities but only as an expense. Upon adoption of the new standards, a real estate tenant with a lease greater than one year would be required to include the lease as both an asset and liability on the balance sheet.
Specifically, lessees will be required to recognize the lease liability, which is a lessee‘s obligation to make lease payments, measured on a discounted basis; and a right-of-use asset, which represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
For tenants, including this liability on their balance sheet may have implications on their compliance with debt covenants and could increase the cost of borrowing. In addition, this requirement places another accounting burden in terms of time and resources to review and account for such leases. To avoid reporting requirements, shorter lease term may be considered. These rules may also impact the types of rent, fixed rent, percentage rent and CAM. The new rules may allow a tenant to treat each expenditures differently and account for only the fixed rent obligations.
White Nelson Diehl Evans can help proactively guide you through these changes and the impact they will have on your financial statements and your business.