New Accounting Change Affects Leasing Transactions

May 20, 2016 Designer

Tax season, a miserable event that all non-dependents must painfully experience each year. Now that 2015 returns are in the mail, it’s time to take a look at what’s on the radar for future tax seasons, paying special attention to commercial real estate accounting issues.

For many of us, filing your taxes can be a complicated process, but it is even more so for business owners whose tax requirements often change each year due to new accounting standards. In this post we will delve into one of these new standards that affects anyone leasing commercial real estate, and debunk some myths along the way.

Commercial Real Estate Accounting Changes

There’s been on-going discussion about a new lease accounting standards update (ASU) from the Financial Accounting Standard Board (FASB), and on February 25, 2016 it came to fruition.

The newly issued ASU will change how leases appear on the balance sheets of companies located in the United States. While the ASU doesn’t go into affect for a few years, it is something that all business owners need to start preparing for, as the last thing anyone wants during tax season is a surprise. Below we provide in-depth detail of the new ASU.

Why the change?

The SEC and other stakeholders have been struggling to develop a more “faithful representation” of business leasing activities, requiring more disclosures and meeting the needs of those who use financial statements. The FASB was tasked with creating a uniform operational standard that would improve the financial reporting of leasing transactions.

What is the new accounting standard?

The current accounting standard defines leases in two ways:

  • Capital Leases (ex. Equipment lease) where the lease assets and liabilities ARE recognized on the balance sheet.
  • Operating Leases (commercial real estate) where the lease assets and liabilities ARE NOT recognized on the balance sheet.

The new accounting standard will require organizations to recognize lease assets and liabilities on their balance sheet for EVERY type of lease.

Who will be affected by the change?

The new ASU affects any company and organization that leases commercial real estate. Those who own assets that are leased will not see any major changes.

The change will particularly be significant for publicly traded corporations and for all companies that write leases of as an expense.

When will the change go into affect?

For public companies the change goes into affect January 1, 2019 for private companies December 15, 2019. It is important to note that every lease that is active when the standard changes will need to be accounted for, nothing will be grandfathered in.

Need more information?

For full information on the new leasing accounting standards update, visit the Financial Accounting Standards Board.