By Rick Zelinsky
The long-awaited change to lease accounting has begun. The 2018 deadline for public companies to comply with Financial Accounting Standards Board (FASB) ASC 842 has already passed. And while the effective date for private companies has been extended to December 15, 2020, the new standard has already drastically altered the way US-based companies account for leases.
As a facility decision-maker, you may think that this standard has little or no impact on your day-to-day responsibilities. But truth be told, the decisions you make about your facilities, the spaces you manage, the equipment you lease, and the contracts that contain hidden leases will all need a second review under the new FASB ASC 842 standard.
It is no longer enough to simply find the right equipment and sign a lease. Your accounting department will now be looking to you to help them uncover these leases, properly track them, and help overhaul the processes for initiating and managing new leases going forward. The new lease standard will also affect your ability to make quick decisions, as the impact of each lease must now be carefully weighed. It is essential that facility management professionals understand the complexities of the new standard so that there is ample time to prepare for process changes once it is adopted across the organization.
Below is a quick but thorough review of the standard and its three main lease categories — the essential parts that bear the most weight on public and private organizations.
Overview Of FASB ASC 842
Previously, operating leases were only disclosed in the notes of a company’s financial statements, but that all changed with the introduction of ASC 842. Now, almost every lease must be reflected on an organization’s balance sheet, which affects liabilities as well as several important financial ratios. The intent of the standard is to overcome a major loophole in the previous ASC 840 standard: off-balance sheet operating leases. The new standard aims to create more transparency relative to the leasing obligations of an organization and help investors make more informed decisions. This will translate into an estimated $3 trillion in operating leases moving onto balance sheets according to the Securities and Exchange Commission and the U.S. Chamber of Commerce.
The way companies will need to account for real estate, equipment, and embedded leases under the new standard presents numerous challenges for companies. For the most part, it means that many more leases must be tracked and accounted for — and this means new processes, controls, and long-term approaches to ensuring the new methods are institutionalized.
One of the simplest to keep track of from a facilities standpoint, real estate leases are a straightforward method of financing an organization’s need for office, retail, and industrial space. While the day to day management of those leases won’t fall under a facility manager’s responsibilities, understanding strategic decisions about specific locations — including renewal and relocation decisions — will help avoid unnecessary capital expenditures on spaces that will be closed.
Leasing is often the preferred way for organizations to acquire assets because it affords the ability to preserve capital while gaining access to much-needed resources. With 80% of U.S. companies leasing some or all their equipment — office and IT equipment, warehouse tools, fleet vehicles, airplanes, etc. — FASB ASC 842 will impact companies across most industries. The challenge with equipment leases is that most companies have them spread across the organization, and they are often being managed in regional offices and/or warehouses. In addition to different physical locations, the lease data could be spread across multiple, disparate systems — including ERPs, Procurement, Lease Accounting and IT asset management technologies.
Embedded leases are the tricky ones and may require a bit of detective work on the part of the facilities manager. Historically, operating leases and service contracts — which may have contained a lease — were both expensed the same way. Going forward, under ASC 842, companies must identify these embedded leases. Where do these embedded leases live? If outsourced, data centers or combined goods and services contracts are used by an organization, then a second look is warranted. How can a contract that contains a lease be identified? If the right to control the use of the asset and obtain all the economic benefits is present, then it’s an embedded lease. It then needs to be determined if each should be categorized as either an operating or finance lease.
Embedded leases vary. One example is a contract for a soda machine, where payment for the supplies is covered by the organization while the vendor provides the machine free of charge. Technically, the organization has a lease for that machine under the new ASC 842 standard. Similarly, another organization may use chemicals that require safe storage — and a third-party company charges for the product but provides the storage free of charge. That, too, qualifies as a lease. Another example is that of a rented warehouse which has a crane that is considered part of the building because it sits on the property — and the lease for that crane is embedded in the building lease signed by a company.
Facilities managers must be prepared to identify all types of lease contracts under the new FASB ASC 842 standard so that their accounting departments have a complete inventory. This process may include providing physical copies of all the leases, so it is never too early to start. There are other considerations organizations and facility managers need to keep in mind moving forward with the new standard, such as: Does it make sense to buy versus lease some equipment to avoid those liabilities on the balance sheet? And how will these leases be tracked and maintained in an organization’s database of leases?
Compliance is not a one-time event. It is not a destination, but a comprehensive change in how all organizations deal with all leases moving forward. By taking a proactive approach to reviewing and accounting for current and future leases, private organizations along with their facilities managers can create an impactful, long-lasting compliance strategy.
Zelinsky is vice president, product strategy at Tango, a Dallas, TX-based provider of integrated workplace management system solutions and lease administration, where he is responsible for market analysis, product roadmap and system design, and for location operation applications. Prior to joining Tango, Zelinksy worked at JPMorgan Chase (JPMC) where he oversaw Global Real Estate Technology of one of the largest corporate and retail tenants. At JPMC, Rick defined and executed a multi-year technology strategy spanning transaction management, capital projects, lease administration and facilities, ultimately resulting in the successful implementation of a single technology platform globally.