Skip to main content
Street, desert and car seen from the rearview mirror

Leases for Dealerships – What to Expect in Year 2

See what dealerships should know now that properly accounting for leases under ASC 842 should be part of regular accounting considerations.
banner background

Now that private companies have adopted Accounting Standards Codification (ASC) 842, Leases, for their 2022 financial statements, what do dealerships need to know for year two?

For leases that were adopted as of January 1, 2022 and had no changes in facts and circumstances during 2023, there should be no significant changes to consider, and the amortization of the right-of-use (ROU) asset and adjustments to the lease liability and other related accounts should follow the amortization schedule originally created.

Lease Modifications

If there are changes to an existing lease’s terms and conditions, they may result in a lease modification. The proper accounting for a lease modification depends on the nature of the change and would fall into one of the following types of modifications:

  • Lease modifications that give the lessee additional rights not included in the original lease, extend or reduce the term of the lease, or change the consideration of the contract
  • Lease modifications that partially or fully terminate a lease

When evaluating a lease modification, it can either result in a new contract that is accounted for separately from the original contract, or it's a single modified contract. Two conditions must be met for the lease modification to create a new lease, but if both conditions are not met, then the modified lease is not a separate lease. The two conditions are: 1) the modification grants the lessee an additional right of use, e.g., the right to use more space in a building, and 2) the lease payments required for the additional right of use are consistent with standalone prices.

A common situation in the dealership industry is amending a lease to exercise a renewal option that was not originally included in the lease term, and this would typically not be considered a separate lease. Rather, this lease modification would require the dealership to remeasure the lease liability and ROU asset at the modification date by reassessing the lease term, discount rate, lease classification, etc.

New Accounting Standard

A new Accounting Standards Update (ASU) was issued in March 2023 that may impact the dealership industry. ASU 2023-01, Common Control Arrangements, is effective for December 31, 2023 year-end companies but can be early adopted. This ASU allows private companies the practical expedient to use the written terms and conditions (rather than legally enforceable terms) for common control arrangements to determine whether a lease exists and, if so, the classification of and accounting for that lease. The ASU requires that leasehold improvements be amortized over the useful life of the improvement as long as the lessee maintains control of the asset through the lease term.

Impairment & Subleases

As the ROU asset is recorded on the lessee’s balance sheet, it now must consider impairment guidance from ASC 360-10 for long-lived assets. Under this guidance, if events or circumstances indicate that the carrying value of the ROU asset may not be recoverable, then the asset should be tested for impairment. One potential indicator for impairment is a significant change to the property’s use.

If the dealership—as the original lessee for the property—decides to sublease the property to a new tenant, typically the original lease remains in effect and the original lessee becomes the intermediate lessor. In this situation, the lessee/intermediate lessor would account for the head lease and the new sublease as separate contracts, and the dealership should consider if this changes the lease term or classification.

Properly accounting for leases under ASC 842 was not a one-time adoption exercise for 2022 but will need to be part of regular accounting considerations on an ongoing basis … and Forvis Mazars can help! If you have any questions or need assistance, please reach out to one of our professionals.

Like what you see?
Subscribe to receive tailored insights directly to your inbox.