|FOREST CITY REALTY TRUST, INC. filed this Form 10-Q on 10/30/2018|
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
New Accounting Guidance
The following accounting pronouncements were adopted during the nine months ended September 30, 2018:
In May 2014, the FASB issued an amendment to the accounting guidance for revenue from contracts with customers. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance defines steps an entity should apply to achieve the core principle. The Company adopted this guidance as of January 1, 2018 using the modified retrospective method and therefore, the comparative information has not been adjusted. The guidance has been applied to contracts that were not completed as of the adoption date. Rental revenue and tenant recoveries from lease contracts represents a significant portion of the Company’s total revenues and is a specific scope exception provided by this guidance. The adoption of this guidance did not result in a material impact on the Company’s consolidated financial statements or disclosures.
In November 2016, the FASB issued an amendment to the accounting guidance on the classification and presentation of changes in restricted cash on the statement of cash flows. The guidance requires restricted cash to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the Consolidated Statement of Cash Flows. The Company adopted this guidance as of January 1, 2018 using the retrospective transition method. The adoption of this guidance significantly increased the combined beginning and ending period cash, cash equivalents and restricted cash balances as of each period presented and removed the effects of the change in restricted cash as previously presented in the Consolidated Statements of Cash Flows for the nine months ended September 30, 2017.
In February 2017, the FASB issued an amendment to the accounting guidance on the derecognition of nonfinancial assets. The guidance clarifies the definition of an in substance nonfinancial asset and the recognition of gains and losses from the transfer of nonfinancial assets and for partial sales of nonfinancial assets, which includes real estate. The Company elected the practical expedient to not apply the guidance on completed contracts. A completed contract is one in which “substantially all” of the revenue from the contract was recognized under the previous accounting guidance. The Company adopted this guidance using the modified retrospective method on January 1, 2018.
In August 2017, the FASB issued an amendment to the accounting guidance on derivatives and hedging activities to better align the financial reporting for hedging activities with their economic objectives. The Company early adopted this guidance on January 1, 2018, using the modified retrospective method requiring a cumulative effect adjustment of $120,000 to recognize the initial application as an adjustment to accumulated other comprehensive income and a corresponding adjustment to beginning retained earnings.
The following new accounting pronouncements will be adopted on their respective effective dates:
In February 2016, the FASB issued an amendment to the accounting guidance on leases. This guidance sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to the current guidance for operating leases. The new guidance requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The new guidance supersedes the previous leases accounting standard. The guidance is effective on January 1, 2019. The adoption of the new guidance is expected to have an impact on the consolidated financial statements as the Company has material ground lease arrangements, as well as other lease agreements. In addition, the Company believes it will be precluded from capitalizing its internal leasing costs, as the costs are not expected to be directly incremental to the successful execution of a lease, as required by the new guidance. The Company is the lessee under several ground leases, as well as leases for office space and some information technology equipment. The Company has continued to work towards the completion of its review and evaluation of the more complex rental adjustments within the ground leases and analyze the impact these adjustments may have when determining the right of use asset and lease liability. The Company has also continued to make progress on the evaluation of appropriate discount rates to be applied to each lease agreement. Therefore, the analysis of the impact the adoption will have on the consolidated financial statements is ongoing. The Company intends to use the practical expedients available to both lessees and lessors upon adoption. For leases in which the Company is the lessor, the Company is in the process of analyzing the various revenue streams from its lease agreements to determine the lease and non-lease components based on the applicable performance obligation associated with the consideration received and when considering the practical expedients available.