NetLease - Amounts previously recognized in respect of business combinations

Background:

Section 805 of the ASC covering business combinations allows for companies to recognize amounts related to operating leases that have favorable or unfavorable terms relative to market terms at the time of the acquisition.  What should be done with these amounts when an entity transitions to ASC 842?

Guidance:

ASC 842-10-65-1h

h.  If an entity has previously recognized an asset or a liability in accordance with Topic 805 on business combinations relating to favorable or unfavorable terms of an operating lease acquired as part of a business combination, the entity shall do all of the following:

  • 1.  Derecognize that asset and liability (except for those arising from leases that are classified as operating leases in accordance with Topic 842 for which the entity is a lessor).
  • 2.  Adjust the carrying amount of the right-of-use asset by a corresponding amount if the entity is a lessee.
  • 3.  Make a corresponding adjustment to equity if assets or liabilities arise from leases that are classified as sales-type leases or direct financing leases in accordance with Topic 842 for which the entity is a lessor. Also see (w).

A company should derecognize that asset or liability and adjust the ROU asset by a corresponding amount. This would mean increasing the ROU Asset when the business combination resulted in an asset or decreasing the ROU Asset when the business combination resulted in a liability.

How To:

When converting your leases to ASC 842 in NetLease there is one primary way that this would get incorporated into the lease. 

Enter the amount of the asset/liability from the business combination into the Lease Prepayment field (positive if an asset, negative if a liability). The amount that you enter should correspond to the unamortized amount of the asset/liability at the commencement date entered into NetLease. 

For example, if entering the lease commencement date as the NetLease go-live date you would enter the unamortized amount as of that date. 

However, if the lease commencement date is the date of the business combination, you would enter the full amount of the recognized asset/liability.  

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