If your company, like most, leases equipment, vehicles or other assets, you’ll need to prepare for the Accounting Standards Update Leases (Topic 842) — often referred to as ASC 842. For public companies and certain others, the rule is effective this year. For non-public companies, this new lease accounting standard is now expected to go into effect for fiscal years beginning after December 15, 2020 (and interim periods within fiscal years beginning after Dec. 15, 2021), as a result of ASU 2019-10 released by the Financial Accounting Standards Board (FASB) on Nov. 15, 2019.
The goal of the new standard is “to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements,” according to the FASB.
To that end, one significant change under the new standard occurs on the balance sheet, which will now include most lease liabilities with terms of more than 12 months, as well as the right to use the asset identified in the lease throughout its term. Previously, many leases weren’t shown on the balance sheet and only disclosed in the notes to the financial statements.
For finance leases, you’ll generally need to:
The requirements are somewhat different for operating leases. Also, if a lease term is for 12 months or less, your company can decide not to recognize the asset and liability and can instead recognize the lease on a straight-line basis over the lease term.
Preparing for the new lease accounting standard requirements may be more involved than it initially appears. It’s not unusual for individual departments within a company to enter into separate lease arrangements. Some leases are embedded within larger contracts and not even recognized as leases. Here are some steps to help you get ready:
The work required to comply with ASC 842 can be significant, but it can also offer benefits. With a better understanding of the lease terms in effect, you may be able to leverage economies of scale and more effectively negotiate future leases. In addition, having this information readily available makes it easier to analyze the lease portfolio.
In the past, some lessees would spend time trying to ensure a lease was considered “operating” and could remain off the financial statements. Because in most cases that’s no longer an option, everyone can instead focus on obtaining the best value for the organization.
Doeren Mayhew’s dedicated Accounting, Audit and Assurance Group can provide more information on the new lease accounting standard and help your organization prepare for it. For more information, contact us today.
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