What are the Impacts of the Coronavirus on Lease Accounting?
The coronavirus outbreak has had a significant effect on the health, safety, and economy of countries around the world. It is also having an impact on accounting and financial reporting, altering the accountants' ability to manage lease accounting. The pandemic has barred the ability to collect and pay rents or comply with other lease obligations. The challenges include a notable increase in lease modification requests and the need for companies to disclose their lease accounting decisions in this changing situation.
The COVID-19 pandemic's effects on the economic and financial markets will impact a company's lease accounting in multiple ways. Companies will need the right accounting tools that can handle such changes and make necessary adjustments to comply with ever-changing requirements. Let's have a closer look at the areas of lease accounting that will be affected by this outbreak.
As the pandemic began to have a major impact on their day-to-day operations, many businesses have shut their doors. Moreover, with stay-at-home orders, many small and medium-sized businesses are at the brink of bankruptcy, also leading to record layoffs and unemployment claims. Although the Government announced a relief package for MSMEs, many lessees will look for negotiating short or long-term lease concessions.
If a lease contract contains clauses regarding rent relief during unforeseeable situations like pandemics, the lessee may experience a favorable impact. However, many contracts don't provide such relief, which may raise the need for lease modification to accommodate rent concession. Any modification to a lease will require the re-measurement of lease accounting calculations.
Lessee Discount Rates
As a response to COVID-19, the central bank has already dropped interest rates which will likely affect a lessee's incremental borrowing rate (IBR). The lowered interest rates will increase the total amount of a lessee's Right-to-Use (ROU) assets and lease liabilities. Hence, lease accounting software must facilitate the ability to quickly feed IBR data and do calculations based on new rates; otherwise, companies might have to spend hours on recalculation.
Fair Market Values
Multiple facets of lease accounting depend on the fair value of underlying and ROU assets. The fair value of such assets impacts lease classification for both lessors and lessees. Any major economic events like the COVID-19 pandemic have a direct impact on fair values. If the sales of commercial property continue to drop, or if companies are forced to close their offices due to decreased business, the value of the commercial real estate will plunge further.
The economic decline due to the ongoing pandemic may result in a significant detrimental change in the value of businesses' assets, leading to the considerations of impairment of ROU assets. Although the process of recording lease-related impairments can be complicated, with automated lease accounting software, impairment processing can be simplified.
There are many unique challenges that you may come across due to the potential economic impacts of the coronavirus. Hence, companies should continuously monitor the rapidly evolving situation, and also keep all the stakeholders informed of the ongoing progress. With an integrated accounting and compliance solution, small businesses and accounting professionals can seamlessly manage their finances and stay complaint.