As your organization begins collecting the necessary data to comply with the new FASB lease accounting rules, it won’t take long before you realize that you won’t get everything from the lease abstraction process. While the bulk of data will be found on your property and other asset leases, you will need to look elsewhere for a number of essential data points.
Keep reading to learn about data points you won’t find in the lease documents and where to turn to get the information you need.
Look beyond the lease abstraction process for these lease accounting data points
These are a few examples of items you’ll need to track down outside the lease abstraction process. Your accounting partners will be able to advise you about which data points are essential for you.
In some cases, the FASB new lease standard requires that lessees document their intentions to execute certain lease options sometime in the future. This may also include an intention to terminate a lease early. These decisions can impact some of the data you will need to report. (Your accounting partners can help you understand how these intentions impact your calculations.)
Obviously, your company’s intentions will never be spelled out on leases, so you won’t get that information from the lease abstraction process. Instead, consult with real estate leaders and other decision makers to learn their intentions related to lease options. When it comes to equipment assets, such as computer equipment or vehicles, your best source will likely be the team that’s using the equipment. That’s one reason it’s important to track location and usage information for equipment assets.
Lease commencement dates
Because property leases are often negotiated far in advance of when the lessee takes possession of the space, the lease itself does not specify the commencement date, or the date that the lease starts. Leases are drafted with a future contingent start date based on when space is ready to be occupied, because no one wants to pay lease payments before they move into a space. The lease commencement date is critically important to your lease accounting because many other data points depend on it, including payment dates, dates for payment increases, required notification dates, and even when the lease terminates.
Often the commencement date is documented in a commencement letter from the lessor. However, this doesn’t always occur and so you may not find the information through the lease abstraction process. In this case, you may need to turn to other sources to determine when a current lease actually began. Here are some recommendations:
- Your accounts payable records can provide the date when payments began.
- You may have records of when you took possession that can help you determine the commencement date.
- For retail locations, look for the date you began showing sales from the register.
- For a restaurant, find out the date of the grand opening.
- Again, your advisory partners can help you make decisions about determining lease commencement dates.
Useful life of assets
Calculating depreciation requires you to know how long an asset remains useful, or its “useful life.” This is another data point you can’t get from the lease abstraction process, since leases rarely include that information. For organizations that must comply with the FASB new lease accounting rules, you’ll need to look up the U.S. GAAP standard tables for each specific type of asset. While these standards are not new, the requirement to report most leases on the balance sheet is new. So you may find yourself working with asset types that you did not report on previously.
Fair market value of property and other assets
Certain types of leases may contain options that are related to fair market value, or the value of an asset as determined by market conditions. For example, a property lease may specify an option to renew the lease at a rate consistent with fair market value. Or, a vehicle lease may specify an option to purchase the vehicle at fair market value at the end of the lease period. Fair market value also can be a factor in classifying leases; if the total value of lease payments exceeds the fair market value of a lease, it may be considered a finance lease.
Neither the lessor or the lessee knows for sure what the fair market value of any leased asset will be in the future, so you won’t find that value through the lease abstraction process. Real estate brokers can help with fair market value for property by reviewing comparable properties by submarket, building type and tenant type. Always confirm those numbers with your accounting partners before proceeding.
Helpful sources of lease information
Your accounting partners
We have mentioned your advisory partners a few times for a reason! Be aware that they should always be your starting point for any questions and decisions about complying with the FASB new lease standard, including the lease abstraction process.
Your own accounting teams, real estate lease administrators, asset management and procurement staff can often fill in the gaps left after the lease abstraction process.
While your internal resources will be a big help, consider going to the best source of record – the lessor. They must invoice lessees to collect revenue, and they also must perform their own lease accounting. In many cases you’ll find that building owners, banks, equipment manufacturers and even service providers can provide you with accurate records beyond what you’ll collect during the lease abstraction process.
Your lease software
The new FASB lease accounting standards now require organizations to track many data points that can’t be extracted during the lease abstracting process. As you may have realized, many of these items are operational data. That’s one reason why lease accounting software that only tracks the financial data can leave you with gaps that impact your timeline to compliance.
Having a more complete lease software solution that tracks ALL the data you need, including lease operation and management information, closes those gaps and reduces the time and complexity of getting ready for FASB ASC 842.
Don’t hesitate to reach out to us at Visual Lease. We’re lease experts and we’re here to help you through your IFRS 16 or ASC 842 transition.
**Visit us at these upcoming events to see Visual Lease in action:
- Controller Summit, Nov 8-9, Boston
- Financial Executives International (FEI), Nov 13-14, New York City
- CBI: Lease Accounting- Implementing ASC 842, Nov 15, Philadelphia**