If your company has a lot of leases, you’re likely up for some drastic changes to your balance sheet. Until recently, leases were an effective way for companies to finance assets without adding new liabilities to their balance sheets.
However, recent lease accounting standards issued by FASB (Financial Accounting Standards Board), IASB (International Accounting Standards Board), and other regulatory boards have changed all of that.
Here Are Three Important Things Companies Need To Know About ASC 842
ASC 842, issued by FASB, is one of these new lease accounting standards and affects a sizable portion of the businesses and nonprofit organizations in the United States.
Below, we’ve laid out three things that every company and nonprofit should know about this new standard.
1. ASC 842 Is Mandatory For Any Business Following US GAAP.
Any company or nonprofit organization that follows US GAAP to report its financial statements is required to adopt ASC 842. This includes both publicly-traded companies as well as private organizations.
The new standard is also completely superseding the old one, ASC 840. As a result, there are likely to be few organizations that will remain completely unaffected by the new standard, such as those that simply have no leases at all or ones whose leases fit various specific criteria.
Publicly-traded companies are all likely to have transitioned already, as ASC 842 is effective for public companies with fiscal years beginning after December 15th, 2018.
Private companies and nonprofits are likely in the midst of the adoption process, though, as their effective date was for organizations with fiscal years beginning after December 15th, 2021. If your company has not begun its transition process yet, you may want to begin now due to the following two points:
2. Almost All Leases Will Need To Be Recorded On The Company Balance Sheet Going Forward.
As stated before, leases have to fit very specific criteria in order to be exempt from the new standard. One example is those that have terms of 12 months or less.
Another notable exception is leases of intangible assets, like software agreements. This may be a relief if you have a lot of SaaS contracts and other similar subscriptions.
As far as leases that are in scope, it generally includes the vast majority of leases of tangible assets, like commercial property and equipment.
You may be thinking, “but rent is an operating expense!” Investors needed more visibility into the real liabilities created by lease agreements, though, in order to more easily make informed decisions about their investments.
This prompted the Boards to institute these changes. A potential effect of this is that if you still have a clean balance sheet following your adoption, you may then look better to potential investors than you once did when compared to other companies.
3. You May Have Leases You Don’t Even Know About.
One complicating factor of ASC 842 is its definition of a lease. A lease can now be just a portion of a contract giving your company control of an asset. This creates a scenario where you could have leases that are embedded in service contracts.
If you have service contracts like these that give you near-exclusive use of an asset, it would be wise to read through them carefully and determine whether or not any portion of the contract fits the new standard’s definition.
Conclusion
These are not the only challenges that are facing organizations now as a result of the new standard. ASC 842 introduces some of the biggest changes to financial accounting in many years.
Many companies are even using software to address these new challenges. Whether you decide to use software or tackle 842 yourself, this is clearly an area that deserves the full attention of the accounting leadership at almost any organization.
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