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US private companies must report leases starting next year

COVID-19’s impact on lease accounting

There may be various pandemic-related accounting and financial reporting considerations specific to the application of the U.S. GAAP and IFRS lease accounting requirements, including those introduced by the FASB’s new lease accounting standard (ASC 842):

* Accounting for rent concessions, rent forgiveness, and/or rent deferral

* Right of use asset impairment

* Applying the lease modification requirements

* Determining key assumptions in measuring the lease in this environment (e.g. discount rate)

* Evaluating certain transactions that may result from business interruption (e.g., sale and leaseback transactions)

The FASB has proposed the deferral of the ASC 842 effective date for certain entities:

* For private companies, including private not-for-profit entities, to fiscal years beginning after Dec. 15, 2021, and interim periods beginning after Dec. 15, 2022.

* For public not-for-profit organizations, to fiscal years beginning after Dec. 15, 2019, including interim periods therein, only if they have not already issued financial statements.

Source: Deloitte

Starting next year, private companies that rent buildings and equipment will need to report the leases on their balance sheets.

A little-known rule established in 2019 for public companies reporting to the U.S. Securities and Exchange Commission, the mandate for new Financial Accounting Standards Board (FASB) records (listed as ASC 842) throws out a bigger net to firms that have not had to report the inventory on their financial records.

Attorney Nancy Dollar of Hanson Bridgett, located outside St. Helena, said companies will need to familiarize themselves with Form 3115, the document needed to report the information to the IRS.

Dollar was concerned the sudden mandate may catch some executives by surprise.

The attorney has fielded calls from clients seeking information on the new standards, which were first proposed in 2013 as a way of making the rules to apply to private and public companies.

Nancy Dollar is a tax attorney with Hansen Bridgett. (Greg Habiby photo)
Nancy Dollar is a tax attorney with Hansen Bridgett. (Greg Habiby photo)

The rule change was established to make a company’s financial liabilities transparent for potential investors, creditors, donors and other capital market participants.

She said public companies, which must answer to shareholders, already face a high disclosure bar.

But a liability may also exist for private companies wanting to demonstrate solvency when they’re seeking loans for capital improvement plans.

“I think it will be a bigger burden for private companies — and may require an overhaul of their system. It’ll be a bigger challenge to them,” she said.

The FASB updated the generally accepted accounting principles (GAAP) as a means “to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions,” the legal language of the rules reads.

The new procedural change may get a little more complicated when commercial real estate changes hands or a company seeks a loan and wants to look good in the eyes of a lender.

“This may have implications on sales (of properties),” said Russ Moroz, a Marcus & Millichap commercial real estate broker.

Jon Dal Poggetto, managing partner, Dal Poggetto & Company LLP
Jon Dal Poggetto, managing partner, Dal Poggetto & Company LLP

Once 2022 starts to close in, brokers expect companies will start bringing their certified public accountants into the picture to make sense of the changes.

“I think this issue will be left up to the CPAs. It’s not a discussion that takes place in the mainstream world,” said Al Coppin, president of commercial real estate brokerage Keegan & Coppin Co. Inc., which has offices in Sonoma, Marin and Napa counties.

Santa Rosa accountant Jon Dal Poggetto is prepared to field inquiries and convinced that, once the deadline nears, the information will get out to the affected parties. The rules were delayed due to the COVID-19 crisis, Dal Poggetto pointed out.

“Most of our clients know something about it. But it will end up affecting a lot of people,” he said.

COVID-19’s impact on lease accounting

There may be various pandemic-related accounting and financial reporting considerations specific to the application of the U.S. GAAP and IFRS lease accounting requirements, including those introduced by the FASB’s new lease accounting standard (ASC 842):

* Accounting for rent concessions, rent forgiveness, and/or rent deferral

* Right of use asset impairment

* Applying the lease modification requirements

* Determining key assumptions in measuring the lease in this environment (e.g. discount rate)

* Evaluating certain transactions that may result from business interruption (e.g., sale and leaseback transactions)

The FASB has proposed the deferral of the ASC 842 effective date for certain entities:

* For private companies, including private not-for-profit entities, to fiscal years beginning after Dec. 15, 2021, and interim periods beginning after Dec. 15, 2022.

* For public not-for-profit organizations, to fiscal years beginning after Dec. 15, 2019, including interim periods therein, only if they have not already issued financial statements.

Source: Deloitte

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