Major Challenges in Accounting for Long-Term & Short-Term Leases Under ASC 842

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The pandemic has significantly changed the way organizations work and how leaders make decisions. This also applies to leases. In the past few months, flexibility has become a key deciding factor for organizations, influencing negotiations and terms in a lease agreement. Previously, organizations preferred long-term leases, but now short-term leases have grown in popularity. 

Under the new lease accounting standards ASC 842, accounting for leases with varying lengths is done differently. It has made the accounting process for long-term and short-term leases a tedious task. Nevertheless, lease accounting software and lease management software have helped businesses to achieve compliance more easily. 

Short-Term Leases

According to the new lease accounting standards under ASC 842, the title “short-term” can be given to an entire set of leases, which was not the case before. If an organization decides to choose this practical expedient, it’s not required to record short-term leases on the balance sheet. 

Thus, it’s essential to determine whether all leases of a certain set will be designated as short-term leases before recording leases into a lease management system. Once you decide to use the short-term title, leases with a 1-year term or less will be handled as short-term leases. Otherwise, all leases will be considered long-term when you do not choose to apply the practical expedient. 

The challenge with short-term leases is the renewal process. It is so because exercising an option, extending lease length, or contract negotiations can be problematic as they can affect the classification by which the lease is recognized as short-term. 

Long-Term Leases

Long-term leases are meant to be recorded on the balance sheet as per the new lease accounting standards ASC 842. Thus, they impact the financials of an organization. Also, contract renewals of long-term leases will have long-term implications. 

Most often, lease agreements involve lease renewal options, or a new contract is negotiated. Whenever a contract does include a renewal option, organizations have the right to opt out and choose a new lease new terms. 

This opens the opportunity for refusing renewal options with a higher price than the current market trend. At the same time, you can negotiate for lower rates or shorter lease terms. It will help you to negotiate rates as per the latest market price. 

Long-term leases are prominent in the real estate industry. In the case of real estate leases, the best practice would be to plan the renewal process of leases in advance. It’s a daunting task to find a new location and requires a lot of money and time to move. Thus, if you wait till the lease expiration date is almost up, negotiation may not possible. 

To keep track of lease renewal dates and other necessary details related to leases, you should use a lease management software, which will send you automated notifications and alerts. Yardi Corom lease accounting software will help your business comply with the new lease accounting standards of ASC 842 without hassles. For more details regarding other essential features of the lease accounting software, visit www.yardicorom.com.