Changes in accounting for real estate revaluation

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Real estate is a major asset class for a business, whether the company operates in commercial real estate or owns headquarters, remote offices, warehouses, factories, and other real estate. This affects cash flow, balance sheet, tax planning and other financial aspects.

Deloitte recently released a short report for some reasons that will appear in this three-part series. This first article looks at the revaluation of real estate and accounting for changes in its use.

During the pandemic, the use of corporate real estate has undergone dramatic changes. Many retail outlets have significantly changed their activities, many have even closed temporarily or permanently. Others, such as grocery stores and pharmacies, have become even more important and valuable. E-commerce has generated huge demand for industrial real estate, especially for last mile services and fill-in. Offices have closed and millions of people have started working from home, raising the question of how much work will be done in shared buildings in the future.

Senior executives had to think about how business strategies might change. CFOs and their teams pondered how to balance real estate portfolios for the present and the future. Potential odds include abandoning the rental property before the scheduled date, negotiating lease changes, obtaining additional space of certain types, or reviewing sale and leaseback arrangements.

Each approach has implications for the organization’s accounting. For example, this could be relevant under Topic 360 of the Accounting Standards Codification of the Financial Accounting Standards Board or ASC 360. As a global investment bank and advisory firm Stout noted“In particular, ASC 360 requires an entity to recognize an impairment loss if and only if the carrying amount of a long-term asset (group of assets) cannot be recovered from the undiscounted cash flows expected from use. and the possible disposal of the asset (the ‘Recoverable Amount’), and if the carrying amount exceeds the fair value of the asset. “

Deloitte writes: “Since assets in the form of right-of-use (ROU) were first recognized under ASC 842 (ie operating leases), ASC 360’s guidance is relatively new in this area and many lessees see accounting requirements as appropriate. accounting difficult. “

According to ASC 360, “long-lived assets or assets should be grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of those from other assets and liabilities,” as Deloitte restated.

This definition creates a lot of complications. The right-of-use asset, or ROU, may be subject to accelerated amortization, but this depends on when the retirement occurred – when it was not used for commercial purposes and could not be subleased. And ROU analysis can show that it cannot be viewed in isolation in a vacuum, but within a relevant group of assets.

“It is important to determine when to revisit a group of assets or identified components of a lease, as these decisions will have a direct impact on the underlying accounting and associated impairment and failure considerations,” the report says.

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