How COVID-19 Impacts Lease Accounting Under ASC 842
As the world continues to grapple with an invisible enemy, our daily lives aren’t all that have been impacted. Companies as a whole have been unable to collect or pay rent on their leased assets, while the changes in ASC 842 have meant that lease accountants all over the globe following GAAP have had to go through their books thoroughly to implement these changes.
This is most prevalent in the case of lessees as they had to restructure their accounting methodologies, not to mention having to deal with lessors and agreeing to delay or decrease lease payments. A reduction in the right of use of leased asset isn’t out of the question either.
Without the right lease accounting software, accountants may have to spend days on end to create workarounds and make compliance-related adjustments. Some areas that have seen significant impacts on lease accounting are listed below.
Impact of Coronavirus on Lease Accounting
Rent Concessions
Due to the economic impact of COVID-19, lessees have been resorting to asking for rent concessions due to unforeseen circumstances. The force majeure clause (where present) has been implemented, and relief has been granted.
Due to the economic impact of COVID-19, lessees have been resorting to asking for rent concessions due to unforeseen circumstances. The force majeure clause (where present) has been implemented, and relief has been granted.
However, where there is no such clause, rent concessions will have to be treated as a lease modification, and therefore re-measurement of lease accounting calculations.
Incremental Borrowing Rate (IBR)
Regulators are dropping interest rates due to the Coronavirus, and as per ASC 842’s discussion about a specific IBR, interest rates will have to be changed for right-of-use (ROU) assets and overall liabilities. This directly impacts the lessee’s balance sheets.
Fair Market Values
It is no secret that almost every asset – be it machinery, property or even labor costs for installation (ASC 360 provision for installation costs) – have seen considerable changes. Some are going up, some are going down. The change in fair market values needs to be compared to NPV (net present value) of any revaluated or impaired asset, and therefore a change in lease classification may be needed.
Termination/Abandonment of Leases
Since the pandemic has impacted business functionality, it means that some leased assets no longer serve any purpose for the business. In that case, many leases have the option of early termination. If there is no such option, the lease will have to be abandoned. In this case, the organization retains liability of the lease amount.
Regardless of the clause, the impact will need to be recorded in the books, along with complete documentation to auditors and disclosure in the books.
All of this can be extremely difficult if done manually. iLeasePro can help you implement such changes in very little time and financial investment. To discuss options, get in touch with us or schedule a free demo!
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