March 15, 2010

5 GAAP/SOX Rules You Need to Know

Lucernex expert Jim Duport discusses the 5 rules you need to know about GAAP/SOX. Learn more about Lx LseMod Corporate for lease analysis including GAAP impact.

1. Rent straight-lined over the term if rent increases are known.
Impact: First Fiscal year cost will increase

 

2. Landlord Tenant Improvement Dollars are shown as a net rent credit, and Total construction cost including Landlord’s TI Dollars are depreciated.
Assume: Construction cost is $30/sf, Landlord paying $21/sf
Old Days: Depreciate $9/sf (part paid by tenant)
Now: Depreciate $30/sf (tenant and landlord cost) Landlord cost shown as credit to rent spread over term Tenant’s capital stays at $9/sf ($30 – $21)
Why? Rationale – base rent includes landlord’s amortization of TI$
Impact: Reduces “rent” charged to the P&L
Increases depreciation
Changes EBITDA

 

3. GAAP rent starts with “beneficial use” GAAP rent starts earlier of when construction starts or lease commences
Assume: Lease starts March 2007, construction starts January 2007
Old days: Start paying costs in March 2007
Now: GAAP rent starts when you “use” the space e.g. January 2007
Why? Tenant, in essence, controls space since construction is for Tenant’s use
Impact: Potential double rent on financial statements during construction (if relocating)
First Fiscal year cost will increase
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4. Restoration amortized over term
aka – “make good” or in UK, called “dilapidations”
Old days: Adjust Cash Flow at the end of term to include Restoration cost
Now: FASB 143 requires the accrual of future liabilities, in this case Restoration / Dilapidations. The following applies if you choose to Apply GAAP Accounting.The methodology used is to estimate the cost now, then apply an inflation factor to estimate the cost at the end of the term, the Future Cost.

The Future Cost is then discounted to a Present Value. The Discounted Present Value of the Future Cost is straight-lined over the lease term AND an accretion expense is applied to the increasing liability. The accrual starts with the GAAP lease term since it represents a liability. Cash Flow needs to be adjusted to reflect the P&L liability and the payment of the actual cost at the end of the lease term
Impact: Increases average annual occupancy cost on P&L

 

5. Rules for sublease analysis write-offs have been further defined
  • Cost written off when decision made. When vacate space or if vacant, when decide to sublease
  • Costs include NPV of rental costs, depreciation write-off, estimated subleasing costs and sublease income
  • Income Statement (P&L) charged the NPV of write-off
  • Monthly, interest expense on declining balance of the NPV Write-Off charged to P&L
  • Declining balance determined by taking net monthly costs and
    interest expense, deducting that from the NPV write-off

 

GAAP Accounting

GAAP Comparison

Shameless Plug

Lx LseMod Corporate Lease Analysis is the market leading application for Corporate lease analysis, providing GAAP impact analysis within detailed P&L and Cash Flow projections. Companies like GE, MetLife, American Express and Robert Half use Lx LseMod Corporate for lease analysis making it the most trusted name in corporate lease analysis.

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February 21, 2010

GAAP in Commercial Real Estate Sublease Accounting

Lucernex expert Jim Duport discusses GAAP sublease accounting.

GAAP Sublease Accounting

Summary of GAAP/FASB Accounting for a Loss Associated with a Sublease

Our interpretation of GAAP sublease analysis according to FASB accounting rules is as follows:
Overview: Start by determining the net present value of all rental costs including write-offs of depreciation and subleasing costs, offset by the sublease income (the NPV write-off). The Income Statement (Profit & Loss statement) is then charged the NPV write-off and it is charged an interest expense based on a declining balance of the NPV write-off, the accretion interest expense. The declining balance is determined by taking the net monthly costs (including sublease income) and the interest expense and deducting that cost from the NPV write-off.

Steps are as follows:

(more…)

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