The new lease accounting standard ASC 842 will significantly impact commercial real estate companies and how they operate. It requires companies to record all leases on their balance sheets. For lessors, it changes the definitions and classifications of leases. This may lead to more companies pursuing shorter term leases. Commercial real estate groups will need to prepare for these changes to avoid issues with adopting the new standard.

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By the CBIZ MHM Complex Accounting Team
T
he long-awaited deadline has finally arrived
for private companies to adopt the new lease
accounting standard, ASC 842, which changes
how organizations account for leases. While the new
standard might appear to be a simple change in the
accounting rules, it is much more. It will impact how
businesses operate, and it will require owners and
operators of commercial real estate (CRE) to make
significant changes to the way they do business. The
effect will be magnified by the impact of hybrid work
models on the office rental landscape.
Learning the complexities of the process and applying
them without error will be no easy feat. With the number
of leases CRE entities generally manage and hold, the
standard could be uniquely complex to adopt for the
sector. It may affect current arrangements with groups
leasing properties from CRE
Here’s a look at how the new accounting standard may
impact the CRE sector.
What Is ASC 842?
The Financial Accounting Standards Board (FASB)
introduced ASC Topic 842, Leases to create more
consistency between the accounting for companies with
leases (lessees) and companies that manage leases
(lessors). New requirements went into effect in late 2018
Changes in Lease Accounting
Are About to Get Real for CRE

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(Continued from page 1)
for public companies and, after several extensions, finally
went into effect for most private companies for fiscal
years beginning after Dec. 15, 2021.
Changes in the new ASC 842 lease accounting standard
will require organizations to record all leases on their
balance sheet, except for short-term leases. For lessors,
this requirement isn’t the part of the standard that’s
new, but it is a significant change for lessees. Prior to
ASC 842, lessees recorded most of their leases off the
balance sheet. Some companies in the CRE sector may
be on the lessee side of an arrangement, but it is likely
that the lessor accounting changes will be the most
applicable to commercial real estate groups. The lessor
changes included in ASC 842, while not as significant
as the lessee changes, will still require advance
preparation to implement.
How Will ASC 842 Affect CRE?
Among the biggest changes to lease accounting for
lessors are the updates ASC 842 makes to the lease
classification test. The new lease accounting standard
changes definitions for leases and the process by which
leases are classified for accounting purposes. A sales-type
lease, for example, is no longer required to have selling
profit or loss. Lessors can only have a direct financing
lease if there is a residual value guarantee by an unrelated
party that, along with the present value of the sum of lease
payments (including any residual value guaranteed by the
lessor), equals or exceeds the fair value of the underlying
asset, all of which is probable of collection.
Lessors should prepare for expanded disclosure
requirements under ASC 842 to provide more information
on the nature of their leases and sub-leases. They will
also be required to disclose how they manage the risk
associated with the residual value of their leased assets.
The financial impact of ASC 842 adoption falls more on
the lessee accounting side, but there may nevertheless
be an impact on lessor-CRE groups. For example, the new
accounting standard does not require short-term leases
to be recorded on a balance sheet, which may lead to
more lessees opting for short-term leases.
The CRE industry is already witnessing a decline in long-
term leases, especially in the aftermath of the pandemic.
Remote work is proving to be a cost-saving alternative to
leasing unused space. Many companies favoring a hybrid
work schedule may pursue short-term leases for smaller
office spaces to meet flexible workplace demands. Now
with the accounting standard change impacting financial
reporting for lessees, traditional long-term leases may
become even less prevalent. The evolving office rental
landscape may also force landlords to accept more short-
term leases to stay competitive; otherwise, they risk
having to increase rent rates.
For More Information
ASC 842 has brought about significant changes for
private companies and the CRE industry. While some
challenges lie ahead for CRE entities in adopting the new
standard, these challenges can be overcome with careful
planning and execution. To be prepared for how ASC 842
may impact their business, CRE owners and operators
should learn all they can about the new standard’s
accounting changes and its implications for leases.
For assistance with the lease accounting adoption, please
connect with a member of our complex accounting team.
Related Content
■ FASB Issues New Lease Accounting Guidance
for Lessors
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Help ASC 842 Adoption