The ASC 842 is a new standard that is impacting both lessees and lessors and creating a significant compliance challenge for both public and private companies. The implementation deadline for private companies is approaching, and by now, most public companies have already implemented the FASB’s new lease accounting change.
How ASC 842 is making an impact
Previously, lessees didn’t have to report operating leases on their GAAP balance sheets. With the new lease accounting change, leases have been reclassified. It now requires lessees to recognize operating leases as an asset on their balance sheets with a comparable lease liability.
Companies are seeing a significant increase in their assets and liabilities as a result of this update.
Some targeted changes are intended to help align lessor accounting with the lessee accounting changes and update revenue recognition rules.
What compliant companies are learning about this new standard:
Adopting the changes is difficult
According to a survey from PwC, 87% of the respondents report that adopting the changes has been difficult. Do not underestimate the amount of effort required to implement these changes. It’s recommended that you start taking an inventory of all of your vital data and documents needed for analyzing and accounting leases.
- Initial agreements
- Non-lease arrangements
Choose the proper software
According to the same survey, more than half of the companies have chosen to accept and implement the new lease management software. Meanwhile, another 17% adapted their current software to meet the changes, and another 22% are continuing to use spreadsheets. Spreadsheets might work for smaller companies, but larger companies might find that the new software can streamline the workflow and provide better accuracy for financial records.
Testing is important
Before the deadline arrives, it is a good idea to run through a mock case using the lease accounting system in place. By manually calculating or using Excel, you can check to make sure that the results of the system are accurate.
Continue to look for opportunities to improve the process
Many public companies found ways to gain better controls, be more efficient, and reduce costs around their lease accounting processes by taking the time to streamline and enhance their accounting processes.
Going forward lease negotiations may be impacted
With the new rules in place, lessees may want to negotiate the terms in their lease payment structures. Lessees may also prefer to have a shorter lease term because they can choose to not include leases with a term of 12 months or less on their balance sheets.
What private companies should do now
With private companies having more time before needing to implement the ASC 842, they should use the identified challenges made by the public companies to help themselves to achieve the process with less of a hardship. By gathering the necessary resources now and understanding how it can affect their businesses, they can develop a plan and put it into a team to put it into motion.
Click here for a closer look at ASC 842