This week’s blog is a comprehensive example explaining how to transition from current GAAP to the new lease accounting standards. We will be using a real life scenario that one of our clients graciously allowed us to use as an example. We have a lot to cover, so let’s get right to it.
Assume a Tenant signs a lease document with the following predicates:
Lease Term: A term commencing on April 1, 2016 (Commencement Date) and continuing for one-hundred-twenty (120) full calendar months. Tenant shall be granted access to the Premises sixty (60) days prior to the Commencement Date to install equipment and furnishings (the “Early Access Period”). Such access shall be subject to all the terms and conditions of this Lease, except that the Commencement Date and the payment of Rent shall not be triggered thereby.
TI Allowance: The tenant received a Tenant Improvement Allowance of $1.2 Million as an incentive to sign the lease from the landlord. The landlord paid the contractor directly for the construction of the Improvements. The improvements were constructed prior to the Early Access Period.
Moving Expenses: The tenant also received a reimbursement of $30,000 in moving expenses from the landlord.
Base Rent: Per the lease document, the rent commencement date is 3 full calendar months after the tenant opens for business at that location. Base rent is $205,000/month; with annual increases on the anniversary of the rent commencement date of 3%.
Assumptions: Assume that the lease is classified as an operating lease, assume that the tenant is a public company, assume that the rate inherent in the lease is unknown, and the fair value of the building is $300 Million. Assume the Tenant opened for business at the location on June 1, 2016. Assume that if the company tried to borrow $300 Million (to purchase the building) its borrowing rate would be 9% in 2019, but if the company tried to borrow $27 Million (the amount of the total lease payments) its borrowing rate would be 6% in 2019.
Here are the steps to take to transition from Current GAAP to the new lease accounting standards issued by the FASB:
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About LeaseQuery: LeaseQuery is lease management software that helps companies manage their leases. Rather than relying on excel spreadsheets, our clients use LeaseQuery to get alerts for critical dates (renewals, etc), calculate the straight-line amortization of rent and TI allowances per GAAP, provide the required monthly journal entries (for both capital and operating leases) and provide the commitment disclosure reports required in the notes and the MD&A. Contact us here.