Accounting for leases has undergone significant changes with the introduction of Accounting Standard Codification (ASC) 842.
Under ASC 842, right-of-use assets and lease liabilities are recognized on the statement of financial position or balance sheet to provide for increased transparency and comparability. However, when it comes to donated space, ASC 842 presents unique considerations.
Under ASC 842, a lease is defined as a contract that conveys the right to control the use of identified property, plant, and equipment for a period of time in exchange for consideration. Donated space refers to the use of property provided to an organization without any exchange of consideration. Therefore, donated space does not meet the definition of a lease under ASC 842. Instead, donated space should be accounted for as a contribution in accordance with ASC 958.
Accounting Standards Update (ASU) 2020-07 provides guidance on the presentation and disclosure of contributed nonfinancial assets, including donated space.
ASU 2020-07 requires organizations to present contributed nonfinancial assets as a separate line item in the statement of activities, apart from contributions of cash or other financial assets. Additionally, organizations must disclose the following information about contributed nonfinancial assets:
- A description of the contributed nonfinancial assets.
- The valuation techniques and inputs used to arrive at a fair value measure.
- The principal market or most advantageous market used to arrive at a fair value measure.
- Any donor-imposed restrictions associated with the use of the contributed nonfinancial assets.
An organization must also consider the impact of below-market lease agreements. In these cases, an organization must account for lease payments made in accordance with ASC 842. It must also account for the difference between lease payments and the fair market value of the use of the leased asset, recording it as a contribution in accordance with ASC 958. That contribution should be recorded at the fair value (less any actual lease payments made) in the period in which the contribution is received, and the related expense recorded in the period the leased asset is used.
Organizations with donated space or below-market leases should consider the impact for these types of leases in accordance with ASC 842, ASC 958 and ASU 2020-07. By doing so, organizations can ensure accurate and transparent financial reporting of contributed nonfinancial assets.
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Don’t forget, Schneider Downs offers simpLEASE, a software program that assists with the accounting requirements set forth by ASC 842. The program was developed in conjunction with the accountants at SD, is easy to use and provides accurate analysis for all lease computations. Visit simpLEASE to learn more.