As new lease accounting for private companies arrives, here’s how it affects affordable housing
The Financial Accounting Standards Board’s (FASB) overhaul of the accounting for leases has had a long journey. First codified by an Accounting Standards Update (ASU) in 2016, the effective date has been delayed multiple times. Public companies transitioned to the new rules in 2019. The global pandemic delayed the adoption by private companies and certain not-for-profits once again. At last, the effective date of the new rules has arrived, meaning that all non-public entities, including partnerships and LLCs, will be required to report under the new standards when they issue their financial statements for annual reporting periods beginning after Dec. 15, 2021.
What type of entities in the Affordable Housing industry might be impacted by the Leasing standard? Some examples:
- Properties that receive low-income housing tax credits (LIHTC) and other affordable housing tax credits
- Affordable housing developers
- Management companies
The most prominent feature of the Leasing standard is presentation of a liability and corresponding right of use asset in the financial statements of lessees. Prior to the new standard, lease expenses were reported each period in the income statement, but the effect of a lease on the reported assets and liabilities was only presented if the lease was classified as a capital lease. Under Topic 842, the new FASB codification created through ASU 2016-02, most lease agreements within the scope of the standard, including operating leases, will result in a recorded Lease Liability and Right of Use Asset on the Balance Sheet or Statement of Financial Position.
Some examples of lease agreements that would be impacted by the standard:
- Leased land on which an affordable housing property is situated
- Leased buildings and facilities
- Equipment used in development or maintenance
- Office space
While there are numerous considerations to prepare for, the most effective way to get started is by gathering agreements that are or that contain leases. With a complete inventory of what lease agreements will be in place at adoption, the classification of those leases will drive the amount of subsequent effort. Leases that were considered capital leases prior to the effective date will be less significantly impacted by adopting the standard. Practical expedients are available, which, if elected, allow the reporting entity to not reassess the classification of existing leases when the standard is adopted. While there are changes that will need to be addressed, accounting for Finance leases will likely be familiar to those with experience with Capital leases prior to the new standard.
Leases classified as Operating leases, on the other hand, will require new calculations and determinations to be made, including:
- The amount of the lease liability for the term or remaining term of the lease
- The discount rate applied to the lease liability
- The amount of cost to record as a Right of Use Asset
New disclosure requirements will need to be understood and reflected in the notes to the financial statements. Taken all together, the guidance in the Leasing standard will likely necessitate new means of tracking and maintaining data specific to leasing agreements.
CohnReznick works to deliver tailored solutions to efficiently address each of our clients' needs when transitioning to the new standard. We offer training sessions for each of our clients to address the impact of the new standard on their portfolios. CohnReznick also released a Lease Accounting Toolkit (LAT) that has been designed as a cost-effective, scalable alternative to lease accounting software solutions to assist in the implementation of ASC 842.