Accounting Guide: Lease Accounting Tips During Financial Crisis

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Managing finances is not an easy feat especially ever since the coronavirus pandemic started. Employers and employees alike are facing immense financial pressure due to the effects of regulations to manage the spread of COVID-19.

A lot of companies had to let go of employees to keep their business afloat. Unfortunately, some small businesses opt to close down instead. Many organizations are dealing with financial fallout and it is uncertain when they can recover.

Due to significant changes across all industries, companies need to ensure that they are still updated with all sorts of things related to their finances. For instance, there is new guidance for lease accounting and a lot of organizations are still struggling to adapt to it. And the ones that have already adopted the new guidance for lease accounting need to ensure that they are doing so the right way amid a sharp increase in lease renegotiations.

Organizations are required to identify assets and liabilities for leases with lease terms of more than 12 months by the new lease accounting standards that the FASB and International Accounting Standards Board or IASB have set. 

This new requirement is a significant task even for companies with fully staffed teams. Complying with this new accounting lease guideline may be a little too much especially for establishments that were forced to downsize due to the dwindling economic state.


How to Handle the New Lease Accounting Guideline

Adopting the new lease accounting guideline may be difficult, but is not impossible. If your current team can’t handle it, you can temporarily hire an accounting agency or a CPA to take care of it.

After all, it is better to invest in a professional and do things right rather than incur more expenses due to penalties because of errors in the process.

Here are some ways to help your company adapt to the new lease accounting guideline:


Understand the new lease accounting standards.

You need to understand the changes before you can adapt to them. 

The IASB amended its lease standard to provide an optional practical expedient that enables lessees to decline the assessment of whether a rent concession related to COVID-19 is a lease modification.

FASB has also adapted and mirrored this standard. It is currently in its post-implementation review process. There is a possibility that more changes are still underway.

You and your accounting team need to stay on top of the updates from the FASB. Take some time to check the relevant websites or review email updates to ensure that you have caught up with the latest changes and implementations. 


Expect that a lease negotiation will complicate audits.

More and more companies are making the shift to a remote workforce setup since the pandemic makes it difficult to physically operate in office spaces. 

This change in setup also means a significant amount of lease negotiations, especially in the real estate industry. 

These negotiations can affect the audit process for public companies. Due to the current state of the economy, some companies are forced to request modifications, concessions, and even the early termination of the leases. 

The new lease accounting guideline makes the auditing process a little more complex than it used to be– which can turn out to be a burden to accounting teams to handle.

The accounting department is not normally involved in the negotiation process, but due to the new standards– the managers in charge of the lease modifications must coordinate with the accounting team to ensure accuracy in the records.

Your accountants must be on the same page as their auditors. Constant communication with your auditor can help avoid unexpected scenarios during year-end audits.


Make sure that your short-term leases are on your reports.

Due to the effects of the remote work setup to companies across all industries– real estate professionals, loan service providers, and even landlords noticed that more and more people are showing interest in short-term leases.

In accounting, Topic 842 does not require companies to report leases with terms shorter than 12 months but terms in the new standard state that companies have to consider their reasonably certain holding period.

Companies are also required to disclose the details of how much of their lease expense relates specifically to short-term leases in the footnotes of their financial reports.

These extra steps add complexity to the lease accounting process since companies need to separate those expenses from the total. Doing so will need the use of multiple general ledger accounts.

So if you are planning for a short-term lease, you need to add every single detail to your report to ensure that your accounting team will have all the information they need.


Bottomline

The pandemic has disrupted the state of the economy and it will continue to affect life as we know it. One of the most affected business aspects is the real estate lease arrangements. 

With the new lease accounting standard in play– you need to address the complexities of transitioning to the new standard by maintaining constant communication with lease managers and their auditors. working collaboratively will help lessen your struggle to adapt to the new guidelines.

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