ASC 842 Lease Accounting Quantitative Disclosure Requirements For Tenants You Need To Know

AUTHOR:  Michael Nichols, Chief Financial Officer

THE CURRENT STATE OF ASC 842

It’s been a little over one year since the Financial Accounting Standards Board (FASB) released the new ASC 842 and 23% of organizations have yet to assess the impact of changes. While the new standard is set to take effect January 1st, 2019, the adjustment of these regulations will have a significant impact on operations and resources.   The new ASC 842 essentially requires companies to build their own disclosure based on a set of proscribed requirements from FASB. According to recent progress reports conducted by Pricewaterhouse Coopers, (PWC) financial executives listed data collection and systems among their biggest challenges. In fact, an estimated 75% of respondents described their implementation issues as “somewhat or very difficult” likely due to the intricate calculations now required. The cost of implementing these regulations are expected to rise but Fischer’s technology is empowering clients to get ahead of the challenge and save thousands of expenses in the long run. Previously, a large portion of lease costs were limited to the income statement and might only appear on the balance sheet as a footnote. Currently, the only disclosures you’re likely to see is in the disclosure for off -balance sheet arrangements and contractual obligations within Management’s Discussion and Analysis, however, this has taken a huge turn requiring a massive manual output from financial reporting.

ASC 842 will now require companies to put their lease obligations on the balance sheet both as a liability and asset (“Lease Liability” and “Right of Use Asset”). The disclosure objective as stated in ASC 842 is for entities to provide information about leases that enable users of financial statements to assess the amount, timing, AND uncertainty of cash flows arising from leases. In order to achieve this objective, lessees will need to do more than just recognize all leases on the balance sheet. Lessees and lessors will be required to disclose both quantitative and qualitative information regarding its leases and the signifi cant judgments made when applying ASC 842, as well as the amounts recognized in the financial statements related to leases. It’s no surprise that companies are investing heavy financial resources and staff into making the needed changes. PWC reported 43% of financial executive indicated they will implement a new lease management system to handle the complexities of this transition and many are allocating internal staff to implement changes. With the complex nature of ASC 842 and deadline swiftly approaching, it’s safe to assume many organizations are at great risk of accelerating a process that requires much diligence. More importantly, the new regulations can help improve lease management if handled properly. For example, are you currently tracking the separate operating and financing cash flows for finance leases vs the operating cash flows for operating leases? Are you capable of building a spreadsheet to track each of the disclosure items on an individual basis for each property in your portfolio that also aggregates them for financial reporting purposes? Just months away from ASC 842 taking effect, these are the questions organizations should be assessing.

EVALUATING OPPORTUNITY

With nearly three decades in tenant representation and customized product development, Fischer is taking lead in providing solutions to help clients leverage these changes as an opportunity. Fischer’s ManagePath product is fully compliant with ASC 842 disclosure requirements and possess a streamlined system of automated calculations and workflows to help mitigate risks. To better help you understand the unusual regulations, let’s examine the key changes surrounding disclosure requirements organizations must start to solve for.

LESSEE DISCLOSURES TO BE AWARE OF

You will notice under paragraph 842-20-50-1 the new issuance requires that a lessee discloses qualitative and quantitative information about its leases in addition to the signifi cant judgements made in applying ASC 842 to those leases and the amounts recognized in the financial statements relating to those leases. 842-20-50-2 requires that a lessee consider the level of detail necessary to satisfy the disclosure objective to ensure it is presenting useful information that is not obscured by providing insignifi cant detail or by aggregating items with different characteristics. To achieve this end 842-20-50-3 is very specifi c and requires that a lessee shall disclose signifi cant qualitative details. Since we’re focused on quantitative disclosures let’s look at the requirements of 842-20-50-4, which stipulates the following information be presented:

UNDERSTANDING THE BIG PICTURE

The amount of information required to meet the quantitative disclosure requirements is substantial. Even for tenants with a relatively small number of properties in their portfolio the eff ort required to gather, analyze and create the necessary quantitative disclosures is enormous. “43% of financial executive indicated they will implement a new lease management system.” Fischer’s ManagePath has a quantitative disclosure schedule built-in, enabling a simple portfolio import with each property’s lease information. ManagePath handles calculations and creates a disclosure schedule that can be delivered straight to your financial reporting team. Supporting details for individual properties or groups of properties are available in the system for custom reporting or for audit support. Below is an example of Fischer’s quantitative disclosure report generated directly from ManagePath using numbers from a hypothetical example portfolio loaded into the system. The disclosure report closely follows the example set forth in paragraph 842-20-55-53 to ensure compliance with ASC 842 disclosure requirements.

Fisher’s Manage Path solution eliminates the need to create complex schedules in support of your disclosure requires. The same system used by your real estate department for managing your portfolio of leased and owned properties can also produce entries for your accounting department and disclosure reports for your financial reporting team. Policy changes are inevitable in today’s volatile market but that shouldn’t warrant companies to exhaust all resources to prepare. Successful implementation is about knowing what resources are best equipped to handle the job at hand. Take comfort in your compliance management and diligently source the best technology or resources to tackle the challenges. 

ABOUT FISCHER

Fischer is a leading global corporate real estate fi rm that provides consulting, brokerage and technology solutions to corporate real estate users looking for a conflict-free broker for their real estate needs. Founded in 1985, Fischer helps clients get the most out of their real estate portfolios and activities by applying its in-depth knowledge of strategic influences to decisions that impact every aspect of their business. Since 1986, Fischer has developed corporate real estate technology solutions and remains the technology innovation leader. Our unique blend of expertise in corporate real estate services and technology has earned us the trust and respect of some of the largest and most successful corporations in the world As exclusive tenant representatives and corporate real estate consultants for many of the world’s largest companies, Fischer delivers results through deep expertise in portfolio management, strategic planning, acquisitions, dispositions, project management, transaction and construction management, capital markets, sale-leasebacks and technology.

RESOURCES

  • Ellis, Jeffrey. Leasing: Disclosures Under ASC 842. Bloomberg BNA. 2017. 14 May 2018.
  • Hale, Vicky. Lease Disclosures: Stepping it up from ASC 840 to ASC 842. GAAP Dynamics. 2017. 14 May 2018.
  • Wyatt, Sheri. 2017 lease accounting survey: implementation progress report. PwC. 2018. 14 May 2018.
  • Young, Michael. What exactly is a lease?. BlumShapiro. 2017. 14 May 2018.