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James Jones
James Jones

Audit And Accounting Guide: Property And Liabil...


The guidance in ASC 360-10 on accounting for abandoned long-lived assets also applies to ROU assets. In the context of a real estate lease, when a lessee decides that it will no longer need a property to support its business requirements but still has a contractual obligation under the underlying lease, the lessee needs to evaluate whether the ROU asset has been or will be abandoned. Abandonment accounting only applies when the underlying property subject to a lease is no longer used for any business purposes, including storage. If the lessee intends to use the space at a future time or retains the intent and ability to sublease the property, abandonment accounting would be inappropriate.




Audit and Accounting Guide: Property and Liabil...



We have seen some companies assert that they are abandoning the property, even though it is only temporarily idled, or that they may still be using it for minor operational needs or may have the intent and ability to sublease it. Under these circumstances, abandonment accounting would not be appropriate. An entity may need to use significant judgment in evaluating whether abandonment has occurred, and a high bar has been set for concluding that a property has been abandoned.


In our experience, establishing management's intent regarding subleasing involves judgment and depends on various facts and circumstances, such as the remaining lease term, the nature of the property, and the level of demand in the rental market. For example, it may be reasonable to conclude that an ROU asset is subject to abandonment accounting when the remaining lease term is shorter and the rental market is, and is expected to remain, weak. On the other hand, it may be more challenging to conclude that management has forgone the opportunity to sublease the property if the remaining lease term is longer, given the increased uncertainty about the level of demand in the rental market over a longer time horizon. It may be particularly difficult to reach such a conclusion in the current environment given the uncertainties related to the duration of the COVID-19 pandemic and its impact on the real estate strategy of other market participants going forward. There are no bright lines regarding the duration of the remaining lease term in this analysis, and the exercise could differ from one rental market to the next. We would also expect specialized properties to be more difficult to sublease than more generic properties such as retail shopping units and office space. Entities should carefully evaluate their specific facts and circumstances when determining whether the ASC 360 abandonment accounting applies to the ROU asset.


It is important for an entity to evaluate the provisions of any sale-and-leaseback arrangement since the contract terms may significantly affect the accounting. For example, the seller-lessee would not be able to derecognize the underlying asset (i.e., a failed sale) or recognize any associated gain or loss on the sale if (1) the contract includes a provision that grants the original owner (future tenant) an option to repurchase the property or (2) the leaseback would be classified as a finance lease. Rather, both parties would account for the transaction as a financing arrangement. The below graphic outlines key considerations related to the accounting for a sale-and-leaseback arrangement.


WHEN COMPANIES HAVE DISCARDED UNCLAIMED property records, state auditors use estimation techniques to determine the liability. To prevent this from happening, companies should adopt record-retention policies compatible with unclaimed property laws.


A COMPANY THAT FAILS TO COMPLY WITH STATE unclaimed property laws increases the likelihood of an audit. States can assess interest and penalties for failure to file unclaimed property reports.


nclaimed property has become increasingly important in the past few years as more states conduct unclaimed property audits of entities that hold such assets. In a period of economic downturn, the states see unclaimed property as a viable nontax revenue source. In this environment CPAs should be aware of state laws as well as some of the financial reporting issues surrounding unclaimed property.


Section 30(e) of the 1981 Uniform Unclaimed Property Act specifically permits the use of estimates where sufficient records are not available to identify unclaimed property amounts. When performing routine tests, an unclaimed property examiner may discover the holder has written off or otherwise removed certain items from its books. Companies seeking to anticipate their potential liability from a state audit will find examiners use a variety of estimation techniques depending on the factual circumstances he or she encounters. This includes standard statistical and mathematical tools and models such as regression analysis, ratio analysis and curve-fitting techniques.


When its historical books and records are missing, a company can estimate its unclaimed property liability using a formula: P x X % = U. In this formula P represents the population of accounting transactions, X represents the unclaimed factor expressed as a percentage and U represents the unclaimed property liability based on the assumption that in a specified population of accounting transactions a certain percentage will end up being unclaimed. The percentage varies based on property type, unclaimed amount, industry, size of company, internal control structure and other relevant variables.


NONCOMPLIANCE WITH UNCLAIMED PROPERTY LAWS Failure to comply with state unclaimed property laws can prove to be costly to a holder. For example, an entity that fails to file annual unclaimed property reports significantly increases the likelihood of an audit. States and their agents routinely audit companies that do not file annual unclaimed property reports or those that consistently file negative reports certifying they have no unclaimed property. The administrative and economic stake is much higher once the state issues an audit assessment; under the rules of most states, a holder then has the burden of refuting the presumption of abandonment and proving the assessment is incorrect.


Compliance risk exists when products, services, or systems associated with third-party relationships are not properly reviewed for compliance or when the third party's operations are not consistent with laws, regulations, ethical standards, or the bank's policies and procedures. Such risks also arise when a third party implements or manages a product or service in a manner that is unfair, deceptive, or abusive to the recipient of the product or service. Compliance risk may arise when a bank licenses or uses technology from a third party that violates a third party's intellectual property rights. Compliance risk may also arise when the third party does not adequately monitor and report transactions for suspicious activities to the bank under the BSA or OFAC. The potential for serious or frequent violations or noncompliance exists when a bank's oversight program does not include appropriate audit and control features, particularly when the third party is implementing new bank activities or expanding existing ones, when activities are further subcontracted, when activities are conducted in foreign countries, or when customer and employee data is transmitted to foreign countries. 041b061a72


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