With the implementation of ASC 842, Leases, right around the corner, real estate entities can take comfort knowing their lessor accounting has minimal impact. For those that are subject to a ground https://turbo-tax.org/ lease as a lessee, now is the time to be preparing for the implementation. Due to the complexities involved, consultation with an experienced real estate advisor is strongly recommended.

Improvements to accounting accuracy and reduction of errors

  1. “Finance lease” is a new term and replaces the term, “capital lease,” used under Topic 840.
  2. Subsequent measurement, recognition of expense, presentation, and disclosure will be impacted by lease classification (i.e., operating or finance lease), which is determined at lease commencement date.
  3. Existing capital leases will not require adjustment or remeasurement upon transition, but they will be referred to as finance leases.
  4. So rent is taxed at the ordinary rate, which may increase the tax burden.

For tenants, ground leases make sense for businesses that need large or expensive pieces of land in prime locations for business success. However, they need to have a plan in place to realize their return on investment during the lifetime of the lease. A ground lease is a long-term lease agreement where a tenant rents land from the landlord and is permitted to develop or improve the land. The landlord retains ownership of the land, but the tenant owns the buildings or improvements for the duration of the lease.

ASC 842 Lease Accounting for Tenants and Landlords

Tenants generally assume responsibility for all financial aspects of a ground lease, including rent, taxes, construction, insurance, and financing. Ground leases can be complex agreements and typically require the assistance of an experienced property lawyer. But done right, they can be very beneficial to both the landlord and the tenant. At the end of a ground lease, ownership of the buildings and improvements usually reverts to the landowner unless the lease is renewed or specific terms are set for the removal of the buildings.

ASC 842: What It Means to Lessors

Leases were classified as either capital or operating, differing in how they were recorded on the company’s financial statements. The new lease accounting standards only apply to financial statements reported under Generally ground lease accounting Accepted Accounting Principles (GAAP). Many real estate companies report their financial statements on the income tax basis of accounting and, therefore, do not need to apply the new lease accounting standards.