ASC 842 Assistance For Lessees
Leasing real estate, equipment, and a range of other products is an important activity for many organizations. In fact, leasing can be an incredible resource to those unwilling or unable to take on the risk of full ownership of an asset. Unfortunately, the lease guidance in effect prior to 2016 has been heavily criticized for failing to meet the needs of financial statement users - particularly when long-term operating leases were in question.
In response, the Financial Accounting Standards Board (FASB) issued the Accounting Standards Update (ASU) 2016-02 Leases (Topic 842) - also referred to as ASC 842 - in 2016. Since then, public business entities, not-for-profit entities, and employee benefit plan sponsors required to file with the Security Exchange Commission were made to adjust the way they account for their leases. Now it's the private companies' turn.
This comprehensive lease accounting resource center is designed to provide you with greater insight into ASC 842 as well as solutions to help you adopt the new guidance and maintain accounting standard compliance. Keep scrolling through this site to discover more helpful lease accounting aids. In the meantime, if you have questions along the way, you can reach out to Rea & Associates' lease accounting task force by clicking here or by reaching out to an individual member.
Answers To Your Lease Accounting Standard Frequently Asked Questions (FAQs)
If You Lease Assets, You Are Affected
If you currently (or plan to) lease assets such as real estate, airplanes, automobiles, and construction and manufacturing equipment, yes, Accounting Standards Codification 842 will impact the way you account for your leases. If your organization is the holder of a lease asset, you are considered a lessee. As such, you will be required to recognize the assets and liabilities for leases with terms greater than 12 months and the rights and obligations created by those leases on the balance sheet.
A Lease Or Not A Lease?
To qualify as a lease under the new standard:
- It must be a physical asset.
- You must have the right to control or use the asset.
- The asset must be explicitly or implicitly identified.
Examples include (but are not exclusive to) office rental, photocopiers, computers and servers, vehicles, and equipment. Examples of what is typically not considered a lease under this new standard are software subscriptions, leases for intangible assets, leases for exploration or use of non-renewable resources, and leases of inventory or assets under construction.
Some judgment will be necessary for analyzing existing leases and implementing the new standard. The good news of a judgment-based standard is that the facts behind your contracts drive the numbers on your financial statements, rather than implementing hardline accounting rules that may not apply to every circumstance.
Keep in mind that this analysis and interpretation increase the time it will take to implement the new standard -which is why you should act now.
There Will Be Much To Consider Moving Forward
As you'd expect, implementing the new lease standard means you will change how you think about and account for individual leases. There are a few additional considerations to keep in mind as well.
Changing accounting methods doesn't change your organization, but it can affect the way your financial results are viewed by outside parties. In particular, adding significant lease liabilities can impact your compliance with debt covenants. It's critical that you get a handle on the potential impact and start conversations with your bank as early as possible.
The new lease standard requires organizations to make policy decisions about how they will handle leases. Many of these policies make implementation easier but often will result in a larger asset and liability on the books. Early on, your organization needs to review and decide on the policies that are right for you.
Process & Controls
In most organizations, operating lease decisions are fairly decentralized, especially when multiple locations are involved. The new lease standard requires these decisions to be documented and available for accounting, which introduces a need for new systems, processes, and controls. The good news is that organizations are often finding efficiencies and cost savings with this new approach.
How We Can HelpThere are many complexities to implementing the new lease standard and we are more than happy to help with the process. Below are some ways we can help you along in your lease accounting implementation journey.
As your CPA firm and trusted advisor, we are always available to answer your questions on the process or lease standard interpretation. Implementing the standard will take a significant amount of work and collaborating can ease that burden.
Given the complexity involved in capturing and controlling accurate data, calculating monthly journal entries, and creating the required footnote disclosure for financial statements, we strongly recommend seeking a software solution, such as LeaseCrunch, to track your lease portfolio. Rea & Associates is working hand-in-hand with LeaseCrunch to make the lives of our clients easier. Click here, or the LeaseCrunch logo below to learn more about simplified lease accounting.
Recognizing the effort involved in implementing the new standard, we have an experienced, trained team ready and waiting to help you collect, analyze, and enter lease data, so you are able to implement the new lease standard in a timely manner.
Some organizations would prefer to focus on their core business applications and leave this sort of work to the experts. Similar to your fixed asset schedules, please let us know if you would like us to maintain your lease portfolio on an ongoing basis.
Next StepsWith the time and work required to implement the new lease standard, we strongly recommend you take action as soon as feasible. It's important to assess:
- The size and complexity of your lease portfolio.
- The strength and current centralization of your processes for leases.
- The policy elections that you will select for the new lease standard.
- The scope of your implementation process.