Just last Wednesday, as the FASB voted to finalize additional aspects of the new lease accounting standards, LeaseCalcs rolled out another important upgrade to make lease accounting and lease analysis even easier.
Among the important results of the FASB’s votes were decisions that will impact sale-leaseback transactions and the establishment of the discount rate non-public entities can use to calculate the asset and liability values reported on their balance sheets.
Sale-Leasebacks – What You Need To Know:
Under the new lease accounting rules for US-GAAP, if the “leaseback” piece of the sale-leaseback is classified as a “Type A” lease instead of a “Type B” lease, the “sale” will be deemed to have “failed” and the seller / lessee will have to account for the transaction as a financing of the property. Hence, the big gain due to the sale that the seller / lessee thought they would realize will not be realized.
For companies who report under IFRS, where all leases will be classified as “Type A” leases, they will still be able to account for sale-leaseback transactions as a sale-leaseback. In other words, sale-leaseback transactions involving long-term leasebacks will still have appeal for internationally headquartered firms.
Beware of the re-purchase option. During last week’s FASB meeting the Board decided that for sale-leasebacks involving real estate – which they deem to be a “specialized asset” – if the seller / lessee obtains an option to re-purchase the property – even if the option were at fair market value – the transaction will have to be accounted for as a financing.
Incremental Borrowing Rates – What You Need To Know:
Non-public entities will be able to make an accounting policy election to use a “risk free rate” for purposes of establishing their liability and asset balances, rather than having to establish what their “incremental borrowing rate” would have been for any given lease. The “risk free rate” is viewed as the rate for “risk free” debt such as US Treasuries for a term comparable to the lease term.
The implication of the use of the risk-free rate is that a tenant’s asset and liability balances will be lower for the same lease accounted for by a publicly traded company whose “incremental borrowing rate” is higher than a private company’s risk free rate.
The use of a risk free rate also implies that for purposes of establishing whether a lease – under the new US-GAAP standards – is a Type A or Type B lease, the same lease classified as a Type B lease by a public company with a higher incremental borrowing rate could be classified as a Type A lease by a private company.
Whether a company uses a lower “risk free” rate or its actual incremental borrowing rate can impact how that lease – or portfolio of leases – impacts its debt to equity ratios, retained earnings and other balance sheet metrics.
Questions? LeaseCalcs has the answers. New lease accounting rules are going to impact all companies – public or private – who lease real estate and will greatly affect the way brokers and corporate real estate executives negotiate and analyze leases. Don’t wait any longer to sign up for LeaseCalcs – we make lease accounting and lease analysis easy.
Another LeaseCalcs Upgrade
LeaseCalcs is continually improving our patent-pending lease accounting and analysis application, and listening to our subscribers at firms like JLL, CBRE, C&W, Cresa, Transwestern, etc. As a result, we released an upgrade to LeaseCalcs that provides our subscribers with yet another way to analyze and understand how leases compare, because sometimes simpler is better. We’re even calling it the Simple Report.
The Simple Report shows you basic information about the leased premises, lease term and free rent, and compares the “structure” of the competing deals (e.g., NNN vs. Base Year vs. “Plus E”, etc.). It also includes the average effective base rental rate over the initial term and any NNN and electric charges at lease commencement. There’s more information, too, like NPV and gross rent costs, along with total net construction costs per square foot. Take a quick look – its great! Of course the more detailed lease accounting and analysis reports brokers, CRE executives and the C-Suite rave about are still there, too. Now there’s no reason not to use LeaseCalcs for every deal, including the simple ones.
Now, lets get back to work – you have deals to do and leases to account for, and we have even more upgrades to roll out!