For those of you who were hoping against hope that the Financial Accounting Standards Board (FASB) would further delay the new lease standard for private companies, I’m afraid you’ll be disappointed. The Pennsylvania Institute of CPAs was looking for a two-year delay for the adoption date, but the FASB turned that request down in November.
That means the requirement for private entities to adopt the new lease accounting standard – Accounting Standards Codification (“ASC”) 842, Leases (“ASC 842”), is quickly approaching. This new lease standard is effective for years beginning after December 15, 2021 (i.e. calendar year 2022) and for interim periods within fiscal years beginning after December 15, 2022.
You can brush up on the full details of the new standards here, but in the meantime, here are five challenges and considerations to help you prepare.
- Know what qualifies as a long-term lease, as short-term leases (12 months or less) are exempted from the new standard. Caution should be used though, as many related party leases are “month to month,” but in economic substance are really longer term leases.
- Select a discount rate for the liability. The FASB did make it a bit easier with a new pronouncement they issued recently, allowing private companies to use the risk-free rate by class of asset (for example you can use the risk-free rate for buildings, but use the incremental borrowing rate for other types of leases, such as equipment leases).
- Use the right software. There is software that can help you track your leases, which is a lot more effective than using Excel. You’ll thank yourself later! Contact me and I’d be happy to talk to you about software options.
- Put the proper controls in place. Controls need to be put in place surrounding leases for the purposes of tracking leases, determining rates and terms, etc. This means updating or adding to your processes and procedures as it relates to your inventory of leases.
- Don’t delay. This is taking a lot more time and resources than people first thought. Preparing now will help ensure that your company remains in compliance with generally accepted accounting principles (GAAP) and, by extension, will streamline your company’s interaction with third-party users of your statements, such as lenders.
Due to changes in the workforce and an overwhelming amount of employers now offering remote work options for their employees, there may be an incentive for companies to not renew expensive leases, and opt for more remote workforces – where it is feasible and makes sense. But for all other leases, the Lease Accounting Standards are about to become a new reality.
By Jim Suttie, CPA (Mentor office)