In 2006, the Financial Accounting Standards Board realized that the standard for lease accounting in the United States was significantly different from the system used in countries that follow the standards set by the International Accounting Standards Board. FASB started a long process of revising their lease standards to better conform with IASB standards. The new standards were finally developed in 2016, and they don't necessarily clear things up internationally. But they are changing the way the companies have to treat their leases from an accounting perspective.
Under the old FASB 13 lease accounting standard, most companies treated their commercial real estate leases as operating lease. With an operating lease, the entire monthly payment was treated as an expense. It reduced operating profits and taxable incomes. In addition, since the lease isn't technically considered debt, it was accounted for off of the company's balance sheet. This helped companies that extensively used leased spaces to reduce both their asset and debt loads.
The problem with this standard, other than the fact that it was different from what the rest of the world did, is that it really didn't reflect reality. The right to control valuable space for a long period of time is an asset. On the other hand, a lease that requires your company to make monthly payments for a long period of time really looks and feels a lot like debt.
The new lease accounting standards from the FASB require you to break your capital leases (now referred to as finance leases) up. You can still count the portion of your lease that goes to operating costs -- the CAMs on a triple net lease -- as a straight expense. However, you have to add the total value of your usage rights under your lease to your balance sheet as an asset and then reduce that asset by the portion of your lease payments that go to cover your use of the property.
With a triple net lease, this is relatively easy to do. Complying with the new FASB standard when you have a gross lease that includes some or all operating costs is more complicated, though, since you will have to separate the value of the built-in cost reimbursements out.
Operating leases don't require you to break the payment streams up. They do, however, require you to put the lease on your balance sheet and use your payments to reduce the value of the asset, just like with a finance lease. Bear in mind that you may also have to add the value of any advantageous options to renew to your balance sheet, further inflating the impact of the lease on your company's overall financial picture.
Complying with the replacements to the FASB 13 standard can be challenging. Having comprehensive records on all of your leases, their terms and the cash flows associated with them is a good start. You will also need skilled accountants who are fully up to date on this new standard to help you correctly analyze how to treat your leases moving forward and how your company's real estate strategy might need to shift.
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