As a lease accounting solution provider, we talk to finance leaders every day who are facing the deadline for FASB ASC 842 and/or IFRS 16 compliance. Not surprisingly, we hear similar questions from almost everyone.
In this blog post, we’ll be able to help guide you with the task you’re probably dreading most: collecting all the data needed to generate lease accounting calculations and reports.
These are two questions that come up in every conversation regarding lease accounting standard compliance:
- What are the important data points we must collect to produce FASB calculations?
- How do I get that data into my lease accounting software? (For more information, please visit our blog post: How to Get Data into Your Lease Accounting Tool).
When people ask questions about gathering their data points, usually, they’re looking for a complete list of all the fields they need to fill in or a lease accounting example they can follow.
While we’d love to provide that, unfortunately, it’s not quite that simple. This is due to a few reasons:
- Reason #1: Each business’ lease portfolio does not look the same and contains many different variables. The data you need to track in your lease accounting software depends on many unique factors, including:
- the type of leased assets you have,
- how your leases are structured,
- your financial reporting needs,
- and your goals for managing your leased assets.
- Reason #2: Never depend on any canned list from a service provider. Always consult with your accounting advisor for new lease accounting guidance. You may need help with interpreting lease data, making decisions, and ensuring you’re capturing lease data accurately.
- Reason #3: To get prepared for FASB, you need much more than a list of data points to capture. You need to understand what to look for in your leases, what to collect from your financials and market information, and what to think about as you collect data.
Therefore, instead of offering a list of fields to collect, this article will help you understand the process and the types of data you’ll need for basic FASB calculations. We’ll also point out the questions you need to ask along the way to make sure, at the end of the day, you have complete and accurate lease accounting reports that are optimized for your business.
How do I identify and categorize my leases?
Identifying leases
When we first begin working with a client, we recommend starting by identifying everything categorized as a lease. This includes any potential embedded leases, real estate leases, equipment leases, and so much more.
Identifying and finding every lease is a complex and time-consuming task. Additionally, not everything you think of as a lease may qualify as one for the FASB standards. And if that wasn’t complicated enough, some contracts that don’t contain the word “lease” actually do qualify as a lease (i.e. embedded lease). We’ve seen some very unique ones that you might not think about, such as box seats at a stadium.
To identify embedded leases, you will need to review service contracts and other types of agreements that may contain them. (Here’s a helpful article that addresses how to do that: Embedded Leases Accounting: Do Your Contracts Contain Leases?)
Identifying real estate leases are not as complex. This is because most organizations commonly have more visibility into them to pay bills and handle the day-to-day operation of facilities. Chances are you have that data in some central location, even if it’s a collection of spreadsheets.
However, equipment leases and other assets tend to be more problematic to identify. Your organization may have many different people and departments leasing smaller assets such as vehicles, computers, and office equipment. Very rarely do we find a company that has all that information in a one place. It may take some detective work to find all the lease documents. As a starting point, we recommend that you get scanned copies of every lease in a central location.
Categorizing your lease portfolio
Once you have managed to collect all your lease documents, the next step is to organize them into any categories you will need for reporting purposes. For example, most organizations will track real estate leases separately from equipment leases. However, you may want to get more granular and separate other assets into specific classes.
Once your leases are categorized in a way that works for your business, you’re ready to start extracting the required FASB data points. The essential lease data for FASB is all about dates and dollars.
Which dates are essential to capture for FASB 87?
FASB lease accounting calculations require all the key dates associated with your leases, which includes:
- When your lease term starts and ends.
- This is straightforward and can be found on the lease contract or a lease commencement letter.
- Lease options that, if exercised, may change when the lease ends.
- For example, does the lease include an option to terminate prior to the expiration date?
- Is there an option to extend the lease past the original end date?
- Do you have an option to purchase the property or asset?
- Can you exercise the option unilaterally? That means you can just execute the option as stated in the lease and you don’t need consent from the owner/lessor.
How will you determine if you’re reasonably certain to exercise lease options?
To do FASB calculations, you must be able to specify if you are reasonably certain to exercise lease options. The answer to that question determines the lease end date used to calculate your lease liability. Ask yourself the following questions:
- Do you have a process in place to regularly review leases and make those decisions?
- How will you make sure you don’t miss critical option dates?
To exercise lease options (to renew a lease or terminate early), you must take action by a specified date, which usually means notifying the owner/lessor of your intention to exercise the option. You might not need to track those notification dates to do your lease accounting calculations, but failing to track these dates in your lease accounting system will come back to bite you.
You’ll want to record lease options so you can do hypothetical calculations that help you make the best decisions about exercising options. A robust lease accounting system like Visual Lease, provides the ability to view side-by-side comparisons with different options and schedules to see how they impact your business.
If you’re not tracking the option dates, you might forget to notify the owner about a renewal option you intended to exercise, which could mean you’d lose out on favorable lease terms and pay much more for the renewal. As a result, all the due diligence you’ve done to choose the right financial plan would potentially be wasted.
Always make sure you’re not overlooking critical operational dates for the current lease term and that your software provides alerts for these critical dates.
Which financials are essential to capture for FASB?
Collecting expense information is an important step to preparing and gathering your essential lease data. At the very least, you’ll need to account for:
- Fixed rent. Your FASB calculations need to show the fixed rent obligation for each right-of-use asset. Be careful about extracting “fixed rent” terms from leases. There may be additional expenses you need to include, such as recurring charges for parking or storage.
- Rent escalation. How are your leases structured? Examine leases for details about how rent escalates. If the lease language is difficult to understand or has a variable contingencies such as CPI adjusted rents or rent due based on consumption or volume (such as number of parking spaces or a percentage of gross sales), you may need help from your accounting advisors to determine how to do the calculations.
- Other charges. Depending on which practical expedient you decide to take, you may need to record real estate CAM (common area maintenance) charges, taxes, and insurance.
How to account for extra charges beyond fixed rent?
Ask yourself, what’s the intent of these charges? Are they really adjusted rents? Variable rents? Do they change based on specific circumstances? Talking to your accounting advisor will help you accurately interpret and extract the relevant expenses.
Will you take practical expedients?
As a lessor, you’re entitled to take a practical expedient when reporting on certain expenses, such as CAM charges. You’ll need to define how you intend to account for each asset class. Make sure you’re capturing asset data in a way that can be meaningfully grouped and reported on.
Do you need to validate straight-line rent calculations?
You need to be able to extract an accurate deferred rent starting balance as of the day you move to ASC 842. Are you comfortable with your current straight-line rent schedule (how you’re normalizing rent over the life of the lease)?
If that process has been manual, you might not be sure you can accurately count on the data. Although, this problem can be solved via a strong lease accounting software provider. Visual Lease’s lease accounting software has a tool that calculates the figures you need to validate your straight-line rent calculations based on your financials.
Post-compliance lease data
We’ll conclude this lease accounting guide with one final bit of advice: don’t view achieving FASB ASC 842 compliance as the end game. From an operational standpoint, you have much to gain from taking full advantage of all the capabilities of your leasing software.
After you get the FASB essentials well underway, the next step is to collect and migrate operational and performance data for your leased assets. Read these related articles to learn more:
