Lease Accounting FAQ
Frequently asked questions: A lessee's perspective
The new lease accounting standards issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), collectively the “Boards,” require virtually all leases be recorded on a company’s balance sheet as both a Right-of-Use (ROU) asset and a lease liability. This is a significant departure from prior lease accounting requirements where most real estate leases were “off-balance sheet.” The FASB and the IASB have issued separate standards and, while they are very similar, there are key differences between the two standards. For calendar-year companies following IASB, the effective date is January 1, 2019. The new FASB standard has an effective date of January 1, 2019, for public companies and January 1, 2020, for private companies on a calendar year. To provide a refresher on the changes to lease accounting—and to help you understand the key technical aspects of these new standards to determine the possible financial impact of potential occupancy decisions—CBRE’s Global Task Force on Lease Accounting has prepared a Frequently Asked Questions (FAQ) document.
Note: A company’s effective date for the new lease accounting standards is determined based on its year-end and whether they report under U.S. Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). While this FAQ makes mention of the “prior” or “previous” lease accounting standards in reference to ASC-840 and IFRS 17, it is important to note that many companies, especially non-public companies that follow U.S. GAAP, have not yet reached their effective date. In this situation, the aforementioned standards would more appropriately be referred to as the “current” or “existing” lease accounting standards.
- Leases of 12 months or less are excluded from the requirements of both standards (IASB and FASB). In addition, the IASB standard allows for a “low value” exception.
- The IASB requires all leases be classified as Finance Leases.
- The FASB has a dual approach to lease classification with two types of leases: Finance Leases and Operating Leases.
- Under the new standards, Finance Leases are accounted for in the same manner as Capital Leases with a front-end-loaded expense pattern.
- Operating Leases under the new FASB standard will continue to have a straight-line Rent Expense.
- All leases—Finance and Operating—will be recorded on the balance sheet as a ROU asset and a lease liability.
- The ROU asset and lease liability are generally determined based upon the present value of the lease payments over the primary term of the lease.
- Renewal options are only included in the determination of the ROU asset and lease liability if they are “reasonably certain” of being exercised.
- The liability associated with an Operating Lease (FASB only) IS NOT CONSIDERED DEBT, while the liability of a Finance Lease IS CONSIDERED DEBT.
- The P&L impact of the new FASB standard will be minimal, while the IASB standard will result in the straight-line Rent Expense of former Operating Leases being replaced with the front-end-loaded expense pattern of Finance Leases.