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    Restaurant Lease Compliance: What to Know

  • Brands should begin thinking now about how they’re going to comply.

    Unsplash/Marcel Heil
    Remember ASC 842 is not a one-time event—it is an ongoing process and any solution selected to solve for it needs to be both comprehensive and flexible, as businesses continue to track and adjust lease information.

    Over the last two years, organizations have been scrambling to comply with the Financial Accounting Standards Board’s (FASB) new lease accounting standard ASC 842. Public companies needed to meet the new requirements by the end of December 2018, and next private companies will be required to do so by December 2020. This regulation includes restaurant chains, who as tenants, already have a complex array of issues to contend with when it comes to leasing; the commercial space often requires expensive tenant build-outs, city and local permits, special use considerations around equipment, and more.

    Due to the nature of the business, the terms of a restaurant’s lease can chip away at profit margins that can ultimately make or break the business. The aim of the FASB ASC 842 standard is to improve transparency by bringing the majority of operating leases on to the balance sheet. But this also requires restaurant chains to inventory all their leases—including a considerable number of equipment leases—and provide additional reporting to be compliant.

    Whether part of a public or private establishment, it’s important that restaurant chains start to incorporate the new accounting practices into their business processes right away. One of the most glaring misconceptions about ASC 842, is the idea that compliance is a one-time event. Becoming compliant is an ongoing process, and companies need to continue to track and document leasing information to remain compliant, which can have a big impact on business controls and processes, and the bottom line, if left unsolved.

    Getting Started, Preparation is Key

    Preparation begins with an investment in accounting resources. Whether that means additional personnel, added training for staff, allocating more time for existing staff to work on compliance, or new tools/software to help people work smarter and faster, companies have to be willing to invest to adapt. It’s not all doom and gloom though. Investing in knowledgeable partners or new lease accounting software can be a boon for improving decision making, delivering new insights, and unearthing untapped savings.

    ASC 842 requires lessees to account for leases lasting over a year on the balance sheet. This changes accounting practices for businesses across the board, but also presents a number of unique challenges specifically to quick service restaurants. The first pain point restaurant companies will have to address is the discrepancy between the traditional 12-month calendar in which most leases are recorded, and the 13 four-week fiscal calendars that the majority of quick service businesses utilize. Consolidating the two is trickier than one might imagine. Rent and other leasing information which is charged on a monthly basis typically does not make a 1:1 translation to the 13 four-week calendars. Companies also need to be cognizant of the fact that the 13 four-week calendar only accounts for 364 days, meaning that every six years owners will have to contend with an additional week that needs to be reported. Tracking expenses on both a bi-weekly and monthly basis can feel like spinning plates, which is why it’s important they institute these new recording procedures as early as possible. Lease accounting software can help to ease the transition by automating the consolidation and helping to balance multiple books so operators can continue to utilize the fiscal calendar that best works for their day-to-day processes.

    Take Inventory and Ensure Best Practices

    Adhering to ASC 842 will also require restaurant companies to take a complete inventory of their leases. Property leases including restaurant locations, offices, and food preparation facilities, are the most straightforward from an inventorying standpoint – but are the most complex from an administration, financial and compliance perspective. But property is just the tip of the iceberg. Most quick service establishments are home to a myriad of leases with equipment and embedded leases making up the vast majority. Many restaurants lease their more expensive kitchen hardware and appliances, such as industrial fryers and dishwashers. All of these need to be accounted for and added onto the balance sheet as well. Restaurant companies also can’t forget about embedded leases that are baked into agreements. A perfect example of an embedded lease is the soft drink fountain, which a lot of quick service restaurants receive free from the vendor but have to pay for the soft drink, which needs to be tracked and recorded. Embedded leases like soft drink fountains, can be a bit more difficult to track as the cost of the lease will vary with the amount of soft drink sold.

    ASC 842 compliance is also an opportunity for private businesses to take a closer look at their practices. Choosing the optimal storefront location and making the best decisions about their other leased assets is vital to the success of any quick service restaurant, so tracking key lease information—on both the administration and accounting side—is a great opportunity for companies to gain a better understanding of the cost/benefit analysis of their lease portfolio. Understanding strategic decisions about specific locations and being able to make decisive decisions about property renewals and relocations will help companies to better control occupancy costs.

    When managing locations, companies need to be aware of the effect this can have on the balance sheet. For example, sunsetting a location will have accounting impacts that need to be reflected on the balance sheet. A restaurant that goes dark yields no remaining assets and results in accelerating the expense. While an owner still may have a lease agreement that has to be paid for, the now-closed location would be defined as an expense, as opposed to an asset and needs to be recorded as such.

    Utilizing lease accounting software that can automate report generation and help to consolidate multiple books and spreadsheets and can greatly help to reduce the impact of complications like bifurcated leases. Additionally, lease administration software that tracks the key terms and conditions of individual locations, can also provide companies with insight on key lease areas such as Common Area Maintenance (CAM) expenses, and help uncover potential savings. Most restaurants that are part of a larger facility like a shopping center will have negotiated an obligation to pay a percentage of the operating costs such as utilities and maintenance. However, tracking and tallying of these items by the landlord is sometimes inaccurate, meaning that companies are often leaving potential savings on the table. These discrepancies are difficult to spot considering all of the variables inherent in a lease, and in most cases would be too challenging to uncover with traditional manual accounting. They are much easier to calculate with software that tracks all critical administration and accounting data related to the lease.

    ASC 842 compliance is a large undertaking and one that should not be taken lightly by quick service restaurants. Between property management, consolidating accounting calendars, and maintaining a full inventory of leases, ASC 842 places a great deal of pressure on accounting departments—as well as other parts of the organization such as real estate, legal and procurement. That’s why it is vital that companies get ahead and start instituting their solutions as soon as possible.

    Remember ASC 842 is not a one-time event—it is an ongoing process and any solution selected to solve for it needs to be both comprehensive and flexible, as businesses continue to track and adjust lease information. Companies that are smart about how they address FASB ASC 842 will find themselves with a few new advantages as well. The right software can help to ease the transition while providing additional useful information such as lease cost/benefit analyses, CAM savings, and faster report generation. Knowledgeable strategic partners can enable operators to take that one step further, helping to offload some of the accounting burdens, while providing new insights on how to best navigate the market.

    Rick Zelinsky is the Vice President of Product for Tango Analytics, a leader in Store Lifecycle Management and Integrated Workplace Management Systems. Rick is responsible for market analysis, product roadmap and system design for location operation applications. Rick brings more than 20 years of real estate technology experience and deep industry knowledge, most notably in lease administration and accounting.