Follow this guide to be in compliance with the latest lease standards in accounting regulations.
Now that the dust is beginning to settle on efforts related to the adoption of Accounting Standards Codification Topic 606: Revenue from Contracts with Customers, it is now time to get started on the next major accounting standard: ASC Topic 842: Leases.
Although the revenue recognition standard might not have affected many hotel entities, Topic 842 will affect all entities that are lessees, and to a lesser extent, those that are lessors.
Under the new lease standard, lessees will be required to record an asset and an offsetting liability for most leases. This will increase reported assets and liabilities for all lessees, sometimes significantly. Common examples of leases in place at hotels include ground leases, vehicles/shuttle buses, golf carts, kitchen equipment, network equipment, computers and copiers. In addition, many hotels are lessors of retail and office space.
This standard will be effective for public companies beginning after 15 December 2018. All other entities will have to comply beginning after 15 December 2019. This standard aligns materially with international accounting standards.
AHLA’s Financial Management Committee recommends that hotel managers and owners start preparing in several ways.
Gather your leases
It is critical that you start with a complete and accurate inventory of leases. Develop a comprehensive checklist or questionnaire for each property to ensure that all leases are obtained. Ensure that a complete inventory of leases is obtained by cross-checking your inventory of leases with a listing of monthly recurring payments made by each property.
Understand who is responsible for the accounting for each lease
Not all leases may be accounted for by the hotel manager. In some instances, the hotel owner takes responsibility for the accounting. Understanding the delineation of responsibilities for lease accounting between hotel manager and hotel owner is of paramount importance to ensure that all leases are being accounted for and that no leases slip through the cracks.
Start your calculations
Once you have gathered all your leases, start performing your calculations of your asset and lease liability. Numerous assumptions will need to be made to perform these calculations. Experience has taught us that implementation questions frequently arise as these detailed calculations are made. Coordinate with your accountants and auditors as you work through your calculations.
Review all of your loan agreements
With an anticipated increase in reported assets and liabilities following the new lease standard, you will need to determine the impact on existing debt covenants. Many loan agreements require U.S. GAAP as of the date of the calculation. Having clarity of future covenant compliance now will give you peace of mind (i.e. avoid unintentionally violating a loan covenant) and allow you to get ahead of negotiations with lenders, if needed.
Gearing up for new disclosures
More information will be required to account for and prepare disclosures under Topic 842. Companies will need to ensure that they develop processes and controls to accumulate the necessary data to support the accounting and disclosures.
In some cases, information systems will need to be modified or obtained to accommodate the additional accounting and required information. Owners should be careful when considering the purchase of software as some packages are owned by Big Four accounting firms, and would not be allowed if the firm was also your company auditor. This is an expensive mistake to make.
Experience has shown us that implementing new accounting standards, particularly those with widespread impact such as leasing, can be an arduous process. We also know that implementation of the leases standard is taking more time that most companies originally anticipated. Get started now. The AHLA has additional information regarding the new Lease Standard available on its web site at www.AHLA.com.
AHLA’s Financial Management Committee provides guidance to hotel operators and owners on issues such as the new lease standards. The committee also establishes operating statement reporting guidance to the hotel industry. The Financial Management Committee publishes the USALI, which is the global standard for the hotel industry for operating statement reporting and guidance.
Tom Gerth is the Mid-Atlantic leader for KPMG’s Building, Construction and Real Estate practice. In more than 25 years with KPMG, he has gained extensive experience in serving real estate entities. He is based in KPMG’s McLean, Virginia, office. He is also a member of the Financial Management Committee of the AHLA.
Raymond D. Martz is the chief financial officer for Pebblebrook Hotel Trust and serves as the Co-Chair on AHLA’s Financial Management Committee. He is a graduate of the School of Hotel Administration at Cornell University and a MBA from Columbia University. The AHLA’s Financial Management Committee supports the overall goals and objectives of the American Hotel & Lodging Association by providing superior financial management expertise on issues of common interest to owners and operators of hotels.
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