On July 30, 2018, the FASB issued a greatly anticipated ASU related to the new lease standard. ASU 2018-11, Leases (Topic 842), Targeted Improvements, has two provisions that are intended to make transition to the new lease standard easier and less costly. One is an additional transition method, providing transition relief that will be of great interest to lessees and lessors. The other provides a new practical expedient for lessors in their identification and separation of lease components.
The new lease standard, ASC 842, changes the treatment of common area maintenance (CAM) within a real estate lease contract. Many real estate leases include some form of CAM, such as cleaning a building lobby, snow removal, landscaping, or janitorial services. Here are some things you need to know about CAM, including what is changing and a few practical examples.
Policy elections that must be made under the new lease accounting standard are a critical part of implementation planning. They impact your clients’ future accounting and financial statement disclosures and your clients may not have even considered them yet. For example:
- Do they understand the difference between lease and non-lease components?
- Do they know that there is a short-term lease exception available?
- Do they know how they want the presentation of lease assets and liabilities on their statement of financial position to appear?
- Do they know that there are a number of practical expedients available that can save them time, but that they must elect them?
While the new lease standard is obviously about accounting for leases, there are broader implications that your clients should consider now, well before implementation. For example:
- Do they understand how operating leases will affect their balance sheet, especially the liabilities?
- How will they find the resources and expertise to gather and analyze their leases?
- What processes might they need to establish so future leases are properly accounted for?
Lease accounting is applied at the lowest asset component. As a result, after you have identified the lease and nonlease components, you as the lessee should determine if the lease contains more than one lease component. You will do this by identifying the individual asset units and their relationships.
You determine if a lease has separate lease components by considering the interdependencies of individual assets covered in a contract. A key consideration is whether the supplier will use multiple assets, or a group of assets that work together, to fulfill the arrangement.
For example, if a customer leases 15 computers and monitors from a technology supplier, then there are clearly multiple assets involved in fulfilling this arrangement.
Is there one or many leases?
Identifying lease and nonlease components
Not all costs related to a lease are included in the leased asset and liability. For example, a lessor may lease a truck and also include a provision to operate the truck on behalf of the lessee. Providing a driver, maintenance and gas are not related to securing the use of the truck and these costs would be considered nonlease components. Another example of a nonlease component is the fee for common area maintenance when renting office space.
Not all arrangements qualify as a lease under the new standard. Of course, sometimes it’s easy to figure out if it’s a lease: renting your office space definitely qualifies as a lease. Copier and vehicle leases are, in fact, leases.
The new lease standard is coming and preparation is critical for a smooth implementation. This is easier said than done and the experts agree: this new standard is complicated.
The new U.S. lease standard, ASC 842, is required for public companies starting their fiscal year after December 15, 2018 and all other companies starting their fiscal year after December 15, 2019. Internationally, the cousin of ASC 842 is IFRS 16, which is effective for annual periods beginning on or after January 1, 2019.