Nearly all organizations on U.S. generally accepted accounting principles (US GAAP) that enter into leases, as defined in this new standard, will be impacted. There are some specified scope exemptions, but this one will likely hit-hard in terms of accounting changes compared to other accounting standard updates, especially for lessees.
The accounting for leases as we know it today (i.e., ASC 840) is being replaced by ASC 842. The main objective of ASC 842 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. Leasing has been an important avenue for a ‘lessee’ to access and use real estate, equipment, automobiles and other depreciable assets legally owned by a ‘lessor,’ and pay over time. That part is not changing. However, new terminology, accounting, and disclosures from this standard run deep, especially for lessees. No longer can today’s operating lease avoid the lessee’s balance sheet unless it is 12 months or less in duration and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. Lessees will now need to recognize both an asset and liability for traditional operating leases unless they are short-term. In essence, balance sheets will be grossed-up as these historical off-balance sheet leases will now need to be captured.
FASB's ASU No. 201t-02 - Leases (Topic 842) is effective for public entities annual reporting periods beginning after December 15, 2018, including interim reporting periods within that reporting period. For all other entities, it is effective for annual reporting periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020. Early application of the amendments is permitted for all entities.
Treat implementation to this standard as an important ‘project’ that has a definitive deadline. While there are many preparations steps, here are some logical ones:
Underestimating the effort this implementation project is likely to take is a common mistake. This new standard has completely revised and changed the scope of lease accounting. For example, a contract does not have to have the word “lease” in it to be a lease. Some service contracts that include the use of a piece of equipment may include an embedded lease. Identifying contracts with these embedded leases will be very important. Another challenge will be identifying and collecting the data to support the new extensive disclosure requirements.
A second CPA firm, such as us, can provide the education, advice and support for successful implementation. Your external audit firm should be kept in the loop in terms of implementation status, but they are generally prohibited from conducting much of the necessary services due to independence concerns. We provide additional information through Changes to Lease Accounting: ASC 842 and learn how we can help through this brochure. In conclusion, don’t let the effective date of this important new accounting standard lull you to sleep. Now is the time to have a thorough game plan defined and in motion. Ensure that adequate resources are in place for successful implementation.