Article written by:
Richard Ansley, CPA
You’re likely aware that a new accounting standard update for leases was issued in 2016. The objective of this update is to bring all leases onto the balance sheet and to recognize them as lease assets and liabilities. It will also bring a change to components within many standard leasing agreements. One of these components that could potentially change is CAM expenses. CAM expenses are related to common areas that are shared by all tenants, including snow removal, landscaping, general maintenance, etc. These expenses can even include management fees, capital expenditures, or advertising occurred for the building or facilities.
Lessors track their CAM expenses, in detail, on a fixed or variable basis. The lessors then recognize the revenue, along with rent, when payment is received. There is often a cap in place on these expenses so the lessor is able to track when they reach the cap, meaning additional expenses will not be reimbursed. Thus, throughout the year, on a monthly basis, the lessor could show a positive or negative effect on income related to the CAM expenses incurred. With the new leasing standard, the lessor will need to consider the CAM expenses as well as the reimbursements separate from the rent revenue and will need to determine each performance obligation related to the various services covered by the lessor. Each of these obligations will have a portion of the agreed upon CAM expenses assigned to each obligation which is recognized as each obligation is met. Whereas the lessor currently tends to view the CAM expenses on a whole basis, the new standard will result in these expenses needing to be tracked and recognized on a per performance obligation basis.
For lessees, the change to the accounting standard won’t have as much of an effect on their recognition of the CAM expenses. Lessees currently recognize CAM expenses on a monthly, quarterly or yearly basis, as determined in the lease. One key difference is that as a lessee, the expenses might have previously run through rent expense as CAM expenses were often viewed as add-on rent. These should be separated from rent expense since there is only a causation, not correlation, between CAM expenses and rent expense. Additionally, as the accounting for lessors could become more complicated, lessees will want to carefully review the calculation of their pro-rata share of CAM expenses. These ratios are often miscalculated; this can include using total property square footage instead of usable square footage or only currently filled square footage. A small mistake on this pro-rata calculation can have a significant impact on the cost incurred by the lessee.