Several economic factors have affected the lease accounting for many commercial real estate entities, including owners, operators, and developers. Explore hot topics, common pitfalls, and more information related to why entities that have adopted ASC 842 should continually monitor, evaluate, and update their lease-related accounting and reporting.
The current macroeconomic environment has created ongoing challenges and uncertainty in various areas ofaccounting, including the accounting for leases. For example, the U.S. 30-year fixed mortgage rate has nearlydoubled since 2016, the year in which ASC 842 was issued.¹
U.S 30-Year Fixed Mortgage Rate
¹ Source for graphic: Mortgage Rates — Freddie Mac.
Many commercial real estate entities have encountered increased costs of capital and tightening lending standards while also dealing with higher levels of maturing debt; reductions in the volume of real estate transactions; and evolving real estate demands and preferences related to the way people work, live, and shop. The actual impact of the current macroeconomic environment on commercial real estate assets will differ on the basis of various factors, including geographic location, tenant-specific operations, and in-place lease terms. Commercial real estate entities, including real estate owners, operators, and developers, should continually monitor, evaluate, and update their lease-related accounting and reporting.
Power More and more companies are leveraging artificial intelligence (AI) to enhance internal productivity or are incorporating generative AI into their revenue-generating products. Advancements in technology have led to rising demand for computing power. ²To fulfill this demand, many technology companies have significantly expanded their data center footprints, leading to a rise in leasing transactions both for data center space and the hardware housed within it. Some of these transactions may also be contracted as service arrangements in which a supplier agrees to provide a specified level of computing capacity to its customer. In such cases, companies should carefully evaluate a service arrangement that involves the use of PP&E to determine whether the arrangement contains a lease.
Demand for electricity to power the surge in AI hardware investments has similarly led to a high volume of transaction activity in the power and utilities sector, including the development of new power generation facilities across the United States to meet regional demand. Given the current macroeconomic environment, many companies in the sector have entered into complex transactions to finance these projects, including saleand-leaseback transactions, build-to-suit arrangements, and synthetic leases (e.g., a lease arrangement in which a significant portion of the lease payments is structured as a residual value guarantee, typically resulting in lower ROU asset and lease liability balances compared with leases with fixed rental payments). Because the accounting for such arrangements can be challenging, companies involved in these types of transactions should consider consulting with their accounting advisers and should continue to monitor developments related to these topics.
Since the issuance of ASU 2016-02 several years ago, the FASB has released various ASUs to provide additional transition relief and make certain technical corrections and improvements to the standard.
In addition, as part of its agenda consultation process, the FASB issued an invitation to comment (ITC) on January 3, 2025, to solicit feedback on the Board’s future standard-setting agenda. Leasing-related items addressed in the ITC include the following:
Comments on the ITC are due by June 30, 2025.
ASC 842 offers practical expedients that can be elected by certain entities or in certain arrangements. For a comprehensive discussion of the lease accounting guidance in ASC 842, see Deloitte's Roadmap Leases.