With the big push to achieve compliance, a lot of businesses have been laser-focused on making the transition to the new FASB/IFRS lease accounting requirements.
While that is understandable, it’s important to also think beyond the transition and look to what is next — namely, keeping up with the required lease accounting remeasurements.
In this blog, we’ll take a look at the common types of lease accounting remeasurements and offer some tips on how to make sure your data stays up to date.
1. What are lease accounting remeasurements?
The work doesn’t stop once you’ve done your initial lease accounting based on your knowledge of all your existing leases. That’s because, while you might think of contracts as being inflexible, the truth is that leases often require changes.
And according to FASB and IFRS codification and guidance, whenever there is a material change to a lease, the way in which you do your accounting must also be adjusted to reflect that change.
So, when circumstances cause changes in either the payments or the value of the lease assets themselves, it triggers the need for these lease accounting remeasurements.
2. Why is doing remeasurements important?
According to FASB/IFRS, if you don’t do lease accounting remeasurements as required when material changes occur, you are no longer in compliance, and your financial statements will be materially misstated.
It’s that simple — and that critically important.
3. What types of changes require lease accounting remeasurements?
Material changes are major events that can commonly occur during the life of a lease and require you to change the accounting pattern that you set up initially.
Both FASB and IFRS require lease accounting remeasurements when the following changes happen. Additionally, IFRS has some unique and somewhat more subtle requirements, which we will discuss a bit later.
When a lease is renegotiated, a remeasurement must be done to reflect the changed terms of the lease. For example:
- At the 2-year mark in a 5-year contract, you’re confident you will want to remain in the same space beyond the current lease term. So, you decide to renegotiate to extend the lease term for an additional 5 years.
- Just 2 years into a 5-year contract, your mall loses a key anchor store — and potentially, a lot of foot traffic. So, you decide to renegotiate with the owner for better terms.
- Halfway through a 10-year lease, a neighboring office on your floor becomes available. Your needs are growing, so you and your landlord amend the lease to add the extra space for the remaining 5 years of the lease.
In each case, your accounting was set up based on the previous lease pattern, so you now need to adjust the numbers in accordance with the renegotiated lease terms.
Changes to the leased assets themselves can also require lease accounting remeasurements. For example:
- Your building is damaged in a flood, making part or all of the office space unusable.
- A leased truck is damaged in an accident. While your driver was not at fault and the truck is still drivable, it is no longer as described in the contract.
In circumstances like these, you have the opportunity to write down some portion of the asset value because the asset is no longer worth what it was before.
Events Related to Unused Space
Here, there are two common scenarios that trigger the need for remeasurements:
- Abandonments — When you are not using a space but cannot get out of the lease, you must continue to pay and account for the space. Here, remeasurement requires you to write down the asset value over a short period of time while still retaining the liability and making the payments.
- Terminations — When you are not using a space and the landlord is letting you out of the lease, remeasurement requires you to include any one-time termination fee you might pay, along with writing down the asset and the liability.
4. What are the unique remeasurement triggers under IFRS?
As we mentioned above, the new IFRS standard requires lease accounting remeasurements based on some additional, and more subtle, lease changes.
Index-based Change of Payments
Under FASB ASC 842, indexed-based changes to payments are considered variable rate payments and do not materially change a lease; therefore, those changes don’t require remeasurements.
However, IFRS requires lease accounting remeasurements whenever you have changes to lease payments based on indexes. For example, if the amount of your payment changes every 6 months or yearly based on inflation according to the CPI, you must do a remeasurement to reflect that change.
Interest Rate Changes
Under IFRS, if the interest rate under which your lease payments are made is changed — due to changes in the market rate, your credit rating, or some other factor — you must do a remeasurement.
That’s true even if the interest rate change is small, because the appreciation schedule you had before was based on an interest rate to which you no longer have access.
An interesting difference: Under FASB, most lease accounting remeasurements must be updated to reflect the current interest rate. However, a change in the interest rate in itself does not trigger a remeasurement requirement.
5. How can you spot the need for lease accounting remeasurements?
Lease accounting is not a one-and-done process, and keeping track of remeasurement requirements is an important part of the ongoing task.
Here are some tips to help you stay spot events that might signal the need for lease accounting remeasurements:
- Stay on top of the data and monitor lease information for changes in key areas. For example, changes in key dates usually happen when there has been a material change to a lease. So, new commencement and expiration dates might indicate an event such as signing a new or renegotiated lease, exercising a termination option, or other adjustments to the length of a lease.
- With real estate leases, keep an eye on information related to the rentable area. For instance, look for changes indicating that area has been given up or new space has been added.
- Monitor the payment structure. An unexpected change in payments might suggest there is a new contract or a change in lease terms that requires a remeasurement.
- Partner with your real estate team. With lease remeasurements triggers such as impairments and abandonments, the signs can be hard to spot through data monitoring alone. Keeping the lines of communication open between the accounting team and the real estate team — the people who typically handle the lease administration tasks — helps you stay on top of important yet subtle events.
- Use Visual Lease for lease administration as well as lease accounting. That way, you’ll have all the key fields set up for tracking lease modifications, events, and activities on an ongoing basis. Plus, you’ll have all the tools you need to do the necessary calculations, including remeasurements.
6. How does Visual Lease make lease accounting remeasurements easier?
Visual Lease not only helps you transition to the new standards. We’re here to help you stay compliant, with data tracking, reporting, and notifications for the life of every lease.
The Visual Lease implementation team uses a structured, robust process to set up the system the way you need it, to track the data points that are important to you. As part of the process, the team works with you to set up any system notifications you might need based on key fields.
The Visual Lease system also provides the ability to upload your own accounting schedules as your needs change or as new scenarios arise. This helps to ensure that Visual Lease always contains a complete picture of your portfolio for creation of your consolidated reporting for the SEC or investors.
In addition, Visual Lease continuously enhances the system, adding new scenarios and nuances to your data tracking and reporting capabilities so that you can keep up with changes over time — including events that require remeasurements.
To learn more about lease accounting remeasurements and other capabilities of the Visual Lease platform, contact us today and we’ll be happy to help.