Lease Accounting in the Deal

You’ve heard it before, “Every deal is different,” and that’s no different when it comes to companies reporting their lease liabilities. Effective January 1, 2022, companies are required to adopt Topic 842 – Leases (“Topic 842”), which significantly changes the presentation of a company’s leasing transactions. 

We’re likely going to see the adoption in M&A transactions treated differently - differently in their adoption in past accounting presentations and treatment in the structure of the deal.  

Typically, in an asset debt, the buyers and sellers enter into cash-free, debt-free transactions, which the buyer purchases the company and its assets on the basis that the seller will pay off all debt and extract all excess cash prior to completion of the transaction. The debt items to be paid off are not typically stated in the letter of intent (“LOI”) and negotiated. Lease obligations are typically treated as debt-like items, but prior to adoption of Topic 842, operating leases weren’t considered as part the buyer’s assessment of debt-like items.  

Comparability and consistency are important in many aspects of a deal. Changes that resulted from the adoption of Topic 842 need to be factored into various aspects of the deal, like the calculation of EBITDA and working capital trends and projections. Buyers and sellers should understand the impact from the new accounting adoption because financial information will look different, and it’s likely going to the impact the deal.

Don’t forget, Schneider Downs offers simpLEASE, a software program that assists with the accounting requirements set forth by ASC 842. The program was developed in conjunction with the accountants at SD, is easy to use and provides accurate analysis for all lease computations. Visit simpLEASE to learn more. 

About Schneider Downs Private Equity Services 

Schneider Downs provides all the traditional audit and tax services needed by private equity firms and their portfolio companies, as well as specialized services including accounting advisory, investment valuations, equity incentive structuring, benefit plan analysis, operational efficiency and risk assessments, cybersecurity and technology solutions.  

To learn more, visit our dedicated Private Equity Firm Services page. 

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