The new lease accounting standard (Topic 842, “Leases”) is effective for fiscal years beginning after Dec. 15, 2019 (calendar year 2020), for Public Not-for-Profits (as defined below) that elected the optional one-year deferral thereof. Such entities should now be implementing Topic 842, and also taking into account any added complications related to COVID-19.

Background

The Financial Accounting Standards Board’s (FASB’s) Accounting Standards Update 2020-05 (ASU 2020-05, issued in June 2020) provided a limited deferral of the effective date of Topic 842 (which supersedes lease accounting under Topic 840) for certain reporting entities. That group included not-for-profit entities that have issued or are conduit bond obligors for securities that are traded, listed, or quoted on an exchange or over-the-counter market – or “Public NFPs” – that had not yet issued financial statements or made financial statements available for issuance as of June 3, 2020 (or have not yet issued 2019 financial statements). For Public NFPs that elected the limited deferral, Topic 842 is effective for fiscal years beginning after Dec. 15, 2019 (calendar year 2020). 

What does CohnReznick think?

The most significant change under Topic 842 is the requirement for lessees to recognize right-of-use assets and corresponding lease liabilities for leases classified as operating. This is significant because prior to Topic 842, lessees generally accounted for their operating lease liabilities and associated assets off-balance sheet.  

In addition, there are challenges with respect to transitioning to and implementing Topic 842, such as selecting practical expedients, including those related to transition, the lessee’s determination of its incremental borrowing rate (or rate implicit in the lease), collectability considerations, variable lease payments, build-to-suit arrangements, and donated rents. 

On top of the complexity of transitioning to Topic 842, not-for-profits will also need to consider whether they have received (or have given) lease concessions in response to the effects of the COVID-19 pandemic. There are unique aspects to accounting for COVID-19 concessions. Further, the pandemic may have constrained an organization’s economic performance, thereby placing pressure on covenant compliance. The recognition of lease liabilities in connection with adopting Topic 842 could compound such pressure. While things will hopefully normalize post-pandemic, those lease liabilities will remain. 

Contact

Matthew Derba, Partner

646.601.7828

Monica Peborde, Senior Manager

646.254.7422

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