CFOs can access extra cash in move to new lease accounting rules
The transition to new lease accounting standards provides an opportunity to tap cash you otherwise might not know you have and help your organization survive the downturn, says Matt Waters, lease accounting director at commercial real estate data company Co-Star Group.
The Financial Accounting Standards Board (FASB), under its ASC 842 standard, requires all organizations to disclose operating leases on their balance sheet, both as an asset and a liability, in the same way as capital leases. It is no longer permissible to disclose leases as expenses on the income statement and in the footnotes to the financials.
Public companies began transitioning to the new standard late last year. Private companies and nonprofits were slated to start at the end of this year, but FASB pushed it to the end of next year to provide flexibility while they grapple with the impact of the pandemic on their operations.
Waters recommends starting the transition process as soon as possible, even with the delay. Public companies' experiences have shown it takes longer than expected.
“I hear over and over and over again they wished they had more time," Waters said last week in a CFO.com webinar.
But there's also cash to be discovered, he said, as accounting or lease administration teams identify all the leases under management, analyze their terms and amendments, and get everything into a single database for proper reporting.
Many leases no longer needed
The first thing organizations are discovering is they often don't need as many leases as they thought they did, especially for real estate, Waters said.
Stay-at-home mandates have shown it can be possible to do the same amount of business with less space. Many people can work from home, saving office costs, and sales can be done online, saving transaction costs.
"Companies are discovering the transition is giving them an opportunity to streamline and rightsize their lease portfolios," he said.
Refundable security deposits
For leases you keep, it's not uncommon to discover you’re owed a security deposit. As you go through your leases, set aside the ones in which you’re owed a deposit and submit a request to get your money back.
"Especially now, if you're looking for a cash source, it’d be nice to know how many of these refundable security deposits are out there," he said.
The deposits are easily overlooked because accounting or lease administration teams often get too busy to keep track of when they’re supposed to be returned for each lease.
"They're all different," he said. "With some, you get it back after a year or after just a few months. With others, they're not due until the end of the lease."
It's typically up to the lessee to ask for the deposit back. "The lessor is not going to just cut you a check," he said.
Unpaid tenant improvement allowances
For many real estate leases, a landlord commonly provide some type of incentive, called a tenant improvement allowance (TIA), often in the form of a reimbursement, for the tenant to make improvements to the asset.
Lease admin teams tend to track these arrangements more closely than security deposits because they typically involve higher amounts, but they also slip through the cracks.
"Many times, companies are not reimbursed fully," Waters said.
Waters said he hears from many companies that they're discovering they've been overpaying on leases.
"It was only when they started consolidating data into one location, putting them into the database, and tracking the clauses associated with leases, that they could identify that rent had been overpaid," he said.
What typically happens, he said, is that accounting teams that have a rent roll will apply what they paid last month to this month and keep rolling it forward rather than go into each lease and see if the terms have changed.
"There's a high probability you have one or two or even many that have been overpaid," he said.
Like other matters involving leases, it is typically up to the lessees to initiate the remedy.
"It's not something lessors typically will notify you of," he said. "A large, sophisticated lessor might, but many lessors are small operations."
Another overlooked area is the common area maintenance (CAM) fee lessees often pay as part of their lease payment. These can change over time, and lessees need to determine whether any money is due.
"[This portion of the agreement] is complicated," he said. "But I’ve seen this as a source of extra cash."
If the lease amount you're paying is tied in any way to the presence of an anchor tenant or that a minimum occupancy level be maintained — relatively common arrangements in retail settings — you might be owed money if the anchor tenant leaves, or goes bankrupt, or if occupancy otherwise falls below the agreed-upon threshold.
"You can receive some money back from the lessor or in the form of reduced rent going forward," he said. "Sometimes, companies switch to flat revenue sharing or a percentage rent agreement, in the case of a co-tenancy violation."
Evergreen fee avoidance
With equipment leases, once the asset reaches a certain point in its lifecycle, your lease moves into what's known as evergreen status and you start paying on a month-to-month basis until you return the asset. Some agreements don’t require you to return the asset at the end of the term. In these cases, it's not unusual for accounting teams to keep paying the lease even after the asset’s no longer used.
"Companies often find they’ve been paying month-to-month status for years on an asset they don’t even use anymore," he said.
Force majeure clauses
If your lease agreement includes a force majeure clause, it’s possible the pandemic is the kind of event that's recognized as a trigger, depending on how the language is written.
If, in going through your leases you discover agreements that include the clause, it could be written in such a way that the clause can be exercised.
Taken together, the lease clauses can amount to a significant inflow of cash if you use the transition to the ASC 842 standard as an opportunity to dig into your lease terms.