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Lease accounting standards might sound like a technical accounting or finance concern, but did you know they are set to have a noticeable impact on convenience store chains?
According to survey results published by Deloitte, the lease accounting standard issued by the Financial Accounting Standards Board (FASB) this past February will have a meaningful impact on retailers, especially those with a large national footprint of leased properties or a significant amount of leased equipment.
In a nutshell, the new standard requires that lessees bring most leases — both real estate and equipment — onto their balance sheets, in many cases creating new assets and liabilities for financial reporting and eliminating off-balance sheet leasing transactions. This ultimately represents a wholesale change to lease accounting for c-store chains and their franchises. As a result, they could face significant implementation challenges during the transition period and beyond.
So, are retailers like convenience stores prepared for this change? Less than 10 percent of Deloitte's survey respondents said their companies were well prepared to comply with the new standard. In light of this, we're going to examine the types of leased assets c-stores need to care about and questions they can consider as they begin to think about the accounting and reporting requirements that lie ahead.
PROPERTY LEASES VS. EQUIPMENT LEASES
The most common leased asset for c-stores is real estate, which can easily constitute a multimillion-dollar portfolio for companies with a widespread, geographic presence.
Starting in 2019 for public companies (2020 for private companies), all leases with a duration of more than 12 months must be brought onto the balance sheet, which will require considerable data collection and maintenance updates. For c-stores with a global footprint, this is further complicated by the various languages, currencies and locations in which real estate leases are recorded and managed.
While real estate leases will likely be the biggest dollar value concern for many c-stores, equipment leases — for items like gas pumps, EMV-enabled credit card processing machines, and more — will perhaps be the more challenging piece of the lease accounting compliance puzzle. Why? These leases are very different from their real estate counterparts in that they are usually smaller ticket items on a per-asset basis, characterized by higher volume, shorter durations and more robust administration.
Due to this, the process of bringing these liabilities onto the balance sheet will require even greater attention to detail. While some of these arrangements may qualify for the short-term lease exemption and others may fall below company-specific capitalization thresholds, they all must be evaluated.
WHAT C-STORES MUST ASK
This sounds complicated, right? Let's boil it all down to a few key questions c-stores should keep in mind when assessing the new rules and bringing leases onto the balance sheet:
Is your data up to snuff? Many c-stores have numerous lease agreements, but unfortunately lease data is often unsystematically collected in spreadsheets or manual documents. Consequently, the collection and abstraction of data can be a resource-intensive effort and may represent a longer lead-time activity for companies with higher lease volumes. It will be important to funnel data into a central spot, but only after it has been subjected to internal control procedures and new calculations.
Is the right technology in place to track your leases? And does it filter up seamlessly into a balance sheet reporting mechanism? Many businesses keep their technology platforms for real estate and non-real estate assets "siloed" due to complexities in tracking them. For example, equipment leases could be just a few pages of data, whereas a real estate lease could easily balloon to hundreds of pages. In the face of new lease accounting standard though, a technology solution that can handle both is going to be an important consideration for c-stores in simplifying the data collection and reporting process.
Have the guarantees around residual values been calculated correctly? In certain lease contracts, lessors may require a guarantee in equipment leases that obligate the lessee to make up any excessive diminution of value at the end of the lease. Let's take a fuel dispenser lease as an example: After three years, the dispenser may only be worth $15,000, but the agreement may require a worth of $20,000. The c-store must make up that shortfall by providing $5,000 cash to recoup the asset value to the lessor. The lessee must make a judgment of the probable amount to be owed under a residual value guarantee at the beginning of the lease term and must monitor throughout. If that amount changes, how does a c-store manage that added exposure? It's an important consideration that now needs to be reflected in the accounting for every equipment lease that contains a residual value guarantee.
These are just some of the questions to consider in the buildup to adoption of the new FASB standard, but there are many others. If you think your organization may have a tougher time complying with the new lease accounting standard than most, don't wait.
Editor’s note: The opinions expressed in this column are the author’s and do not necessarily reflect the views of Convenience Store News.