Acquirers must analyze the Fair Value
of operating leases if these leases are
acquired during an acquisition and
if the rent differs from the market at
the time of the acquisition, as stated
in ASC paragraph 805-20-25-12:
Regardless of whether the
acquiree is the lessee or the
lessor, the acquirer shall
determine whether the terms
of each of an acquiree’s operating
leases are favorable or
unfavorable compared with the
market terms of leases of
the same or similar items at
the acquisition date. The
acquirer shall recognize an
intangible asset if the terms of an
operating lease are favorable
relative to market terms and a
liability if the terms are
unfavorable relative to market
terms.
When the rent on an operating lease
paid by an acquiree is less than the
market rate rent, an intangible asset
for the operating lease may need to
be recorded on the balance sheet.
Similarly, if the rent on an operating
lease paid by an entity is more than
the market rate rent, a liability for the
operating lease may also need to be
recorded. The following are the main
inputs used to determine the Fair
Value of an operating lease:
• Rent paid by the target company
or acquirer.
• Estimated comparable market
rent: For real estate leases, the
estimated comparable market
rent may be based on commercial
real estate brokers’ surveys, the
National Association of Realtors
reports, or other market indices.
Of course, the nature of the
underlying assets needs to
be analyzed.
• Forecast period: The forecast
period is based on the
remaining period for the
property’s operating lease.
• Discount rate: Depending on the
nature of the lease, the discount
rate may be based on applying
a long-term growth rate, normally
2-4%, plus the applicable cap rate
of the nearest major market for
the subject property.
Many times, operating leases can
be exempt from a detailed analysis,
especially if an operating lease was
recently completed or renewed.
2
| Valuation Vantage
Spring-Summer 2014
“
Don’t Forget the Fair Value of Operating Leases
”
continued
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Acquirers must analyze the Fair Value of operating leases if the rent differs from
the market at the time of the acquisition.
