Companies have had over five years to process the new lease accounting standard, ASC 842, since the Financial Accounting Standards Board issued it in 2016. Public companies have implemented ASC 842, but for some private companies, the effective date has still not come to pass. With the deadline finally (and rapidly) approaching for private companies that haven’t yet adopted ASC 842, here is the latest on the new lease accounting standard, including the changes created by ASC 842.
What Are the ASC 842 Changes?
Under the new lease accounting standard, companies are expected to bring right-of-use assets and associated obligations onto the balance sheet, and out of the footnotes. By putting their operating leases onto their balance sheets, many companies will appear to be more leveraged than they were under historical GAAP. From FASB’s point of view, these changes will provide a clearer picture of companies’ leasing activities.
A common new lease accounting example has often centered around the leasing of airplanes. Before the lease accounting standard, ASC 842, a multi-year lease did not appear as an ongoing obligation on the balance sheet for an airline—this was an accepted accounting treatment that some viewed as providing a misleading picture.
When Are the New Lease Accounting Rules Effective?
Like the new revenue recognition standard (ASC 606), the effective date was moved last year for the new lease accounting standard. Public companies began following ASC 842 for fiscal years beginning after December 15, 2018, while privately held companies, with some exceptions, are expected to have implemented ASC 842 for fiscal years beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted.
Citing the pandemic and its predicted economic impacts in June 2020, FASB delayed, by one year, the effective dates of the new ASC 842 lease accounting standard for private companies and nonprofits that hadn’t yet gone through the process of implementing the rules. The delay was recognition that the implementation process can be an enormous one for most companies even during a “normal” year: Public companies that implemented ASC 842 had quickly realized that simply gathering the information needed throughout their organizations was enormously time-consuming, on top of the analysis required to decide on the appropriate accounting treatment.
Adoption of the Lease Accounting Standard, ASC 842
While procrastinators may have been rewarded with extra time through the most recent delay in the new lease accounting standard, there is no reason to assume that any other delay will be forthcoming.
Companies that have implemented the rule caught on pretty quickly that, like the revenue recognition standard, the leasing standard tends to be more involved than first expected, particularly for companies that have a decentralized leasing process (or no process at all). Earlier adopters were surprised by embedded leases in service contracts in addition to the work involved in scoping out those leases to understand the services being provided and the assets under use.
Knowing the extensive work involved, for efficiency’s sake, it’s advisable to form a project team and to involve multiple organizations as the company gets a handle on the many agreements and whether they need to be reclassified under the new rule. This effort should include any international agreements, too, so be sure to build in time for English translations if necessary.
You may be surprised by some deals that were informally made that would fall under this guidance. Then you’ll have to decide whether each agreement is in fact a lease or would be considered an agreement for buying or selling goods or services (and thus not subject to the rule).
Implementing ASC 842 Lease Accounting the Right Way
Adoption of the new lease accounting rule goes beyond changing where you report your leases. For some companies, it’s an ongoing effort that’s leading them to change how future deals are structured, and that may require some education on the finance team’s part to help, say, the operations group understand the effects of a big accounting change.
Indeed, before you even reach the effective date of the lease accounting standard, you may want to revisit some of the wording used in leasing contracts. Some debt covenants may be affected once the accounting standard is adopted, but you could get ahead of that by putting the work in now. Also remember to factor in the auditor scrutiny that will be ahead of you.
To ensure you are covering the many details, and doing so as efficiently as possible, technical accounting expertise can get your team through it. Accounting experts armed with lessons learned, best practices, and insights around the new lease accounting standard that can be tailored to your company can help you get through the implementation process.