Lease Standard Education Series for Nonprofits – Building Lease Example, Change in Lease Classification

• November 17, 2022
• Robert Zuengler

In the last installment we covered a building lease example where there was no change in lease classification, and, in this installment, we look at the same building lease example, however, this time there is a change in lease classification. 

Pre-Modification Facts

Same facts as our prior building lease example, with the below changes:

• Instead of entering into a lease of a new building, ABC Nonprofit decides to enter into a lease with XYZ Company for an older office building while their new building is being constructed. ABC Nonprofit figures it will take 6 years to raise the capital, negotiate contracts, and construct their new building. The remaining economic life of the old building is 10 years, and the fair value of the building is $150,000.

Modification Facts

Same facts as our prior building lease example, with the below changes:

• Due to multiple setbacks, additional development funds are needed, and ABC Nonprofit decides to extend its lease with XYZ Company on the January 1, 2025 modification date for an additional 3 years. The remaining economic life of the old building is now 7 years and the fair value of the building is still $150,000.

Lease Analysis

Based upon the facts above, the lease is deemed an operating lease relationship before the modification date and a financing lease relationship at the modification date and prospectively. Below are charts walking through the lease analysis performed:

Lease Accounting

Based upon the facts above, ABC Nonprofit would recognize a lease liability and ROU asset similarly to what is documented in our prior building lease example from lease initiation through the modification date adjustment on January 1, 2025.  After the modification date, because of the switch in lease relationships from operating to financing, this is where the accounting differs. ABC Nonprofit should no longer use the operating lease journal entries but switch to the financing lease journal entries presented in the copier lease installment.  Additionally, ABC Nonprofit needs to change its financial presentation prospectively.  The tables below represent the lease liability, net ROU asset, and related journal entry information for each year through the modified lease term:

How CLA Can Help?

The new lease standard is here. Be proactive to understand its impact on your nonprofit. CLA has the lease resources to help assess its impacts beyond general accounting and financial reporting, and walk you through readiness assessment, software selection and analysis, and implementation.

A turnkey lease accounting option can include: 

• Assistance to identify and analyze leases that are subject to the standard
• Delivery of leased asset schedules, journal entries, and comprehensive footnote disclosures
• Updated and revised information at future interim or annual periods based on your needs

Lease Education Series

Stay tuned! In our next post we are taking a dive deeper into this new standard, looking at financial statement presentation and footnote disclosures.

In case you missed or would like to recall upon any prior content, below is a running list of the educational series:

Series Introduction

Lease Standard Basics

Discount Rates

Lease Identification and Lease Term

Practical Expedients and Policy Elections

Copier Lease Example

Building Lease Example, No Change in Lease Classification

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