What is the new lease accounting standard?
ASC-842, the new lease accounting standard, has been in effect for private companies with fiscal years ending December 31 since the beginning of the year, and for public companies since 2019. ASC-842 provides a new definition of a lease based on whether one party obtains the right to control the use of an identified asset for a period of time in exchange for consideration. It also classifies all leases as either finance or operating and there is no scope exception for leases of low value assets such as personal computers or copiers.
However, lessees can elect an accounting policy to not recognize the lease terms that are for 12 months or less in duration and where there is no option to purchase the underlying asset.
Accounting used by lessors remains largely unchanged from current generally accepted accounting principles (“ASC-840”). However, the new standard does make some targeted improvements, updates revenue recognition requirements (for example, assessment of collectability in order to qualify for sales-type lease or direct financing lease), and adds disclosures.
How will this impact your business?
The new standard will cause major changes in lessees’ balance sheets (or statements of financial position) and disclosure requirements. ASC-840 does not require assets and liabilities to be recognized for most lessees. Under ASC-842, all lessees must report in their balance sheets a “right-of-use” asset, representing the right to use the underlying asset during the lease term, and a liability to make lease payments over the lease term. Recognition, measurement, and presentation of expenses and cash flows in the lessees’ other financial statements won’t change significantly.
Implementing the new lease accounting standards
Almost a year into its effective date, your business should at least be in the early stages of transitioning to these new standards to ensure compliance. The leaders of our audit practice, Marc Lichtman and Michelle Felmlee, have been planting the seeds with clients and assisting with the transition and have been searching for an innovative solution to implementing these complex standards. We’ve partnered with LeaseCrunch in order to facilitate a simple and smooth transition to an otherwise arduous and complicated process.
LeaseCrunch was built by accountants for accountants and is a highly intuitive software that will require less labor and time than alternatives. Felmlee and Lichtman have been guiding clients through the transition to the new standards via LeaseCrunch for the better part of the year and have seen faster implementation, less time spent for acclimation and training, greater accuracy and a reduced total cost of ownership.
Our experienced audit partners and lease accounting specialists have been monitoring all aspects of the new standards and are well equipped to brief your team and act as a partner to make sure your business transitions smoothly and meets compliance requirements.
Fill out the form below to speak with an audit professional.