This article, "The New Lease Accounting Standard Is Here, Are You Ready?," originally appeared on HMPC.com.
The new lease standard, Financial Accounting Standards Board (FASB) ASC 842, is effective for private companies that present their financials under US GAAP with fiscal years beginning after December 15, 2021.
What is Lease Accounting (ASC 842)?
ASC 842, Leases, provides the financial accounting and reporting requirements for lessees and lessors. Under the new standard, lessees will recognize an asset on the balance sheet, representing their right to use the leased asset over the lease term and recognizing a corresponding lease liability to make the lease payments. The lease liability is based on the present value of future lease payments using a discount rate to determine the present value based on the rate implicit in the lease, if readily determinable, or the lessee’s incremental borrowing rate. As a result, a lessee’s operating lease accounting model will change significantly.
What changes can I expect?
Finance leases will separately recognize interest expenses on the liability and amortization expense on the right-of-use asset. The periodic expense at the beginning of the lease term will generally be greater than the corresponding cash payments but will decline over the lease term as the liability is reduced. Operating leases will recognize lease expense on a straight-line basis over the lease term as a single line item in operating expenses in the income statement.
What challenges can I expect?
This standard represents a wholesale change to lease accounting; as a result, many entities will face significant implementation challenges such as:
- Not identifying embedded leases in arrangements
- The number of arrangements that were previously not identified as leases may now be identified as meeting the definition of a lease or embedded lease
- Existing systems and processes may need to be modified or enhanced in order to provide information necessary to address the new reporting and disclosure requirements
- Multiple departments across the organization will be affected by this standard, including information technology, tax, legal, treasury, and financial planning and analysis, among others
This standard includes extensive disclosures intended to enable users of financial statements to understand the amount, timing, and judgment related to a reporting entity’s accounting for leases and the related cash flows.
How we can help
HM&M can help you take steps to implement the new lease accounting standard. We can help assess the accounting and financial reporting impact and walk you through the software selection and standard implementation. Please reach out to your trusted HM&M advisor to get started.