What Life Science Companies Need to Know about Lease Accounting
New requirements mean you should start now
For fiscal years beginning in 2022, privately owned life science companies are now required to record leasing activities and their financial impacts in a new manner as detailed in FASB ASC 842. (Public companies have been subject to the same requirement since 2019.)
The new requirements apply to many types of leases you have or may enter into, either as lessee or lessor, such as office buildings, lab equipment, medical devices, and more. Leases for short-term rentals, biological assets, and intangibles are excluded, as are certain others.
Currently, there is no expected impact on income taxes.
Leases that meet a specific criterion must be recorded in your company’s financial statement. The changes effectively eliminate off-balance sheet reporting and expand disclosure requirements. For lessees, there will be notable impacts on operating leases while only minimal effects on finance (capital) leases.
Increased Liabilities
The new standard will bring more liabilities onto your company’s balance sheet, possibly more than has ever been reported before. The effect on leverage ratios, working capital, and liquidity can be very significant, and can skew how your owners, lenders, potential partners, and others view your company. It is important to inform your financial partners of these changes.
At PBO Advisory, we recommend that companies start now in determining which leases apply and how to convert them onto your company’s balance sheet. Companies with a large volume of leases should not wait as the work involved to move to this new reporting standard may be demanding.
Analyzing Your Leases
The first step to take is determining what is considered a lease under ASC 842. This can require thorough review and analysis of your existing leases, depending partially on how the contract is written. “Bundled” arrangements require additional analysis, and reviewing service arrangements for “embedded leases” is more important than ever.
Once you have determined which leases are subject to the new requirements, several additional steps must be taken to analyze which components of the arrangement are considered as a lease and which are not. Then you must allocate them accordingly based on relative standalone prices.
You must also take into consideration such issues as lease incentives, sales tax on lease payments, variable payments, and classification (operating vs. finance) before you begin the liability calculation determination.
Needless to say, the process can be extensive and require a deep understanding of the new lease standard.
PBO Advisory Group’s lease accounting professionals are specifically educated in the nuances of ASC 842 and how companies must comply. We have extensive expertise working with life science companies and are available to provide consultation and/or outsourced staff to assist you with determining your ASC 842 responsibilities.
Please contact Josh Siler, CPA, our Senior Manager, Business Advisory Services, for more information.
Josh Siler, CPA
Senior Manager, Business Advisory Services
josh@pboadvisory.com
858-935-4869