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Real Estate Journal — Spring Preview — April 29 - May 12, 2016 — 19C
M id A tlantic
A ccounting
By Alfred Erdmann CPA, CGMA, WithumSmith+Brown, PC New lease accounting standard on the horizon
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lessees must assess the likeli- hood of options to extend be- ing exercised. Extension op- tions should only be included if it is “reasonably certain” that they will be exercised. Leases for terms of 12 months or less are excluded from the new standard and can be ex- pensed currently. Leases between related parties should be accounted for under the terms and con- ditions of the lease, but the parties must also apply the related party disclosure rules. Generally speaking, the les- sor in a sublease (lessee in the original lease) should account
for each lease independently of the other. It is important to note that these rules only apply to GAAP basis financial state- ments. Entities that report on an income tax basis will not be affected. For public companies, this new standard is effective for fiscal years beginning after December 15, 2018 (calendar year 2019 for many companies) and any interim periods within that year. For all other entities, it is effective for fiscal years beginning after December 15, 2019 (calendar year 2020 for many entities) and any
or several years now, the accounting stan- dard-setting body in
will be required to reflect right-of-use assets and corre- sponding lease liabilities. The lease liability will generally be calculated as the present value of the minimum lease payments. The amounts to be included as rent under a lease should only include fixed payments, such as base rent and any minimum operating expense recovery, and variable pay- ments based on an index (CPI, e.g.) or rate. This is calculated using the index or rate measured at the com- mencement date. In evaluating lease terms,
interim periods within fiscal years beginning after Decem- ber 15, 2020. For these and all real-es- tate-related matters, it is always important to consult with a trusted advisor with a broad base of experience in the real estate industry. In addi- tion to traditional accounting, auditing and tax services, a firm like Withum can help increase profitability while reducing operating costs. Alfred Erdmann CPA, CGMA, is the audit ser- vices practice leader for Withum’s Real Estate Ser- vices Group. n
the United States, the F i n a n c i a l A c c o u n t - i ng S t an - dards Board ( F A S B ) , and the in- ternational accounting
Alfred Erdmann
standard-setting body, the International Accounting Standards Board (IASB), have been working on various convergence projects in an ef- fort to achieve more uniform accounting standards world- wide. Not surprisingly, lease accounting has consistently been among the topics in this initiative. It was – and is – among the most highly commented-upon topics in the overall project. Several exposure drafts were issued, which garnered significant commentary and feedback from many sources. Ultimately, the IASB and FASB each issued new stan- dards in the first quarter of 2016, with the FASB issuing Accounting Standards Up- date No. 2016-02, Leases. Lessor accounting for leases is largely unchanged. The significant changes occur on the lessee side of leases. The following is a summary of the major points emanating from this new standard. For lessees, all leases will be accounted for by recogniz- ing a right of use (ROU) asset and a corresponding lease liability at lease inception. On this point, the FASB and IASB agree. However, they do not on the subsequent recognition. Under the FASB standard, lessees will be required to classify leases as Type A or Type B. These classifications are not much different than the existing capital/operat- ing lease classifications, with capital leases becoming Type A leases. Under a Type A lease, lessees would recognize amortization of the ROU asset separately from the interest expense on the lease liability. Under a Type B lease, lessees would recognize a single lease expense. The IASB allows only the Type A lease designation for lessees. Leases of real property typi- cally qualify as operating, or Type B, leases. Therefore, balance sheets for tenants
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