With the new FASB lease accounting standards going into effect soon, it’s time to get your financial data in order. That includes detailed information about all your lease assets and liabilities.
For years, only capital leases needed to be included on company balance sheets, and corporate real estate leaders could get most of the required reporting information from lease abstracts. Now, both capital and operating leases need to be included. And with the quickly-approaching need to comply with the new International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) lease accounting standards, CRE leaders are going to need more data than a lease abstract can provide.
Here are three things you’ll need to track that won’t be on your lease abstract.
3 Key Lease Accounting Details You Need To Start Tracking
1. Intention Decisions
Most of the lease details enterprises must now report on in order to be compliant with the new lease accounting standards are hard facts and figures, such as dates and costs. Unfortunately, there are other pieces of information businesses must provide that aren’t as objective.
One of these is intention decisions. Your company’s financial and operational status will not remain the same as it is the day you sign a property or asset lease. This means you may decide at some point in the future that it makes sense to terminate a lease before the agreement end date. Or perhaps you’ll choose to purchase the property or asset outright. How you intend to manage your leases will impact what data you are required to report.
To understand how decisions like these will affect your reporting, consult your lease accounting partners. They are well-versed in the new lease accounting standards and will be able to explain how to ensure your calculations and documentation are compliant.
2. Fair Market Value (FMV)
Fair market value (FMV) is an estimate of the value of an asset or property based on current market conditions. Basically, if the asset or property were to be put up for sale to the public as-is, fair market value is what a knowledgeable buyer would pay to own it. FMV falls into the gray area between objective and conceptual. While it is a set amount, it can’t be calculated in advance since market conditions are always changing.
Say a landlord and a lessee are discussing renewing a lease that expires the following year. Instead of the lessee paying the same rate for the next contract period, the landlord offers the lessee the option to pay a rate more in line with the FMV of the property. But because there’s no way to know what the FMV will be in a year, that information won’t be in the lease abstract. To determine the approximate FMV and therefore have an amount to include in their reporting, CRE leaders can review the value of comparable properties in the area that have similar building and tenant types.
3. Useful Life of Assets
Generally Accepted Accounting Principles (GAAP) require companies to report the full acquisition expenses for fixed assets. This includes the cost for installation, assembly, freight, warehousing, insurance and taxes. Where reporting gets complicated is when a business must calculate how the value of an asset has depreciated. In order to calculate this number, the business must know the “useful life” of an asset, which is the length of time it expects an asset to remain in service and useful to the company.
However, like FMV, this information won’t be in the lease abstract since there are multiple variables that affect an asset’s useful life. Therefore, you’ll need to consult the GAAP useful lives and salvage values tables for each asset. While your company has likely already been reporting these figures for certain assets, there are some assets that may not have previously been included on the balance sheet but are now required by the lease accounting standards update.
If you want to make it easier on your company to maintain compliance with the new lease accounting standards (and who wouldn’t?), we recommend researching asset management software and lease accounting software. These solutions can help your organization create more comprehensive profiles on each property and asset. And having access to these details will make reporting a much simpler process.
Other Important Lease Management Details
If you don’t have access to these lease accounting details now, you’re going to need them soon. And while you’re looking at your leases, don’t forget about the basics.
- Lease agreement type
- Start date
- End date
- Tenant (Lessee)
- Landlord (Lessor)
- Renewal option
- Renewal notification requirement
- Termination notification
- Monthly payment
- Yearly rent obligation
- 3-Year lease obligation forecast
Having an asset management system to store detailed information about your assets, including lease abstracts, can help. And with iOFFICE’s powerful dashboards, you can get all the information you need with just a few clicks.
When you have all the lease accounting details you need, there’s no reason to live in fear of FASB.