What Businesses Need to Know About New Lease Accounting Standard

The new lease accounting standard, ASC 842, has brought significant changes to the way businesses must report their leases. The Financial Accounting Standards Board (FASB) released the new standard in 2016, and it became effective for public companies in 2019. Private companies had until 2021 to comply with the new standard.

With this new lease accounting standard in place, businesses must understand what it entails and how it can impact their financial reporting. This article will cover the key aspects of ASC 842 and what businesses need to know to comply with it.

What is ASC 842?

ASC 842 is the new accounting standard for leases that replaces the previous standard, ASC 840. Under ASC 842, businesses must recognize all lease agreements on their balance sheets, including both operating leases and finance leases. The standard aims to improve transparency in financial reporting by providing a clearer picture of a company's leasing obligations and related expenses.

ASC 842 affects businesses of all sizes and industries that lease assets, including retailers, manufacturers, healthcare providers, and others. The standard applies to both private and public companies and requires all leases with terms of more than 12 months to be recognized on the balance sheet.

If you are still unsure about what lease accounting is, you can get detailed ASC 842 information from EZLease. It has resources covering topics such as lease identification, classification, and measurement, as well as lease modifications and disclosures. They provide detailed explanations of the new standard and its impact on financial statements, along with practical guidance on how to comply with ASC 842.

Key Changes Introduced by ASC 842

Under ASC 842, businesses must make several changes to how they report leases. Some of these changes include:

1. Recognition of Operating Leases on Balance Sheets

One of the most significant changes brought about by ASC 842 is the recognition of operating leases on balance sheets. Previously, operating leases were not recognized on balance sheets, and businesses only reported lease payments as an expense on their income statement. Under ASC 842, businesses must recognize the right-to-use assets and lease liabilities on their balance sheets.

2. Change in Lease Classification Criteria

Under ASC 840, leases were classified as either operating leases or capital leases. However, leases are classified as finance leases or operating leases based on specific criteria, including the lease term and present value of lease payments.

3. Changes to Lease Disclosure Requirements

ASC 842 also introduces changes to lease disclosure requirements. Companies are required to disclose additional information about leases, particularly the terms and conditions of leases, the amount and timing of lease payments, and other information about leases.

How to Comply with ASC 842

Many companies find it challenging to comply with ASC 842, particularly with a high number of leases. According to the new standard, businesses should adhere to the following guidelines:

1. Identify and Evaluate All Lease Arrangements

The new standard requires all lease arrangements to be identified and evaluated based on the new lease classification criteria. This includes identifying both finance leases and operating leases.

2. Record Right-to-Use Assets and Lease Liabilities

Once businesses have identified their lease arrangements, they must record right-to-use assets and lease liabilities on their balance sheets. This requires calculating the present value of lease payments and recording the corresponding assets and liabilities.

3. Update Accounting Policies and Procedures

Accounting policies and procedures must also be updated to be compliant with ASC 842. It entails updating their financial reporting systems and instructing employees about the new standard.

4. Disclose Information about Lease Arrangements

Finally, companies must disclose information about their lease arrangements in their financial statements. The information should include details about lease terms and conditions, the amount and timing of lease payments, and other relevant information related to the lease agreement.

Benefits of Compliance

While complying with ASC 842 may require significant effort, there are several benefits to doing so. These include:

1. Improved Transparency

By adhering to the ASC 842 standards, businesses benefit from enhanced visibility in their financial reporting. Recording all lease obligations on balance sheets paints a detailed and accurate picture of their fiscal standing for stakeholders, investors, or any other individuals who are interested.

2. More Accurate Financial Reporting

ASC 842 requires businesses to record right-to-use assets and lease liabilities at their present value. It ensures more accurate financial reporting and makes it easier for businesses to make informed leasing decisions.

3. Reduced Risk of Non-compliance

Business penalties and other adverse consequences can result from non-compliance with ASC 842. By complying with the standard, businesses can reduce the risk of violating the standard and avoid these negative consequences.

Implementation Challenges

Although ASC 842 provides many benefits, implementing the standard can be challenging. The following are some of the key challenges associated with implementation:

·         Data Collection and Analysis

All lease arrangements must be analyzed and data collected following ASC 842. It can be a time-consuming process, especially for businesses with a large number of leases.

·         Lease Classification

Introducing new lease classification criteria also presents challenges. Determining whether a lease is a finance lease or an operating lease requires careful analysis of lease terms and conditions, as well as the present value of lease payments.

·         Lease Accounting Software

To comply with the standard, many businesses may need to acquire new lease accounting software. It can be costly and may even require additional training for employees to use the new software effectively.

·         Financial Reporting Systems

The following changes will require financial reporting systems need to be updated. This will require significant changes to existing processes and systems.

Conclusion

ASC 842 is a new lease accounting standard that necessitates businesses to accurately reflect all their leasing arrangements on their balance sheet. Even though meeting the requirements of this regulation can be quite laborious, there are many perks associated with it, including greater transparency in financials, improved accuracy for reporting purposes, and minimized risk of litigation due to non-compliance.

To meet the requirements of ASC 842, companies must identify all lease contracts, record assets and liabilities arising from them, update their accounting policies, and outline information about leases in financial statements. This structured process will not only ensure adherence to the new standard but also provide further advantages for businesses.