How to Handle New Lease Accounting Standards: ASC 842

New lease accounting standards may change the flow of your business. Here's what to know about ASC 842 before December 15th.

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How to Handle New Lease Accounting Standards: ASC 842

Posted by Gary Ashton RE/MAX on Monday, December 13th, 2021 at 9:31am.

How to Handle ASC 824 Lease Accounting StandardsAfter several delays, the Financial Accounting Standards Board's (FASB) Accounting Standards Update Leases (ASC) is going into effect on December 15th. This new standard is called ASC 842, which significantly impacts how both public and private businesses in Nashville and nationwide manage, account for, and ultimately report leases—including property and equipment.

Before implementing ASC 842, most leases weren't included on financial balance sheets, but under these standards, companies need to report all right-of-use liabilities and assets on balance sheets for just about all leases. Will ASC 842 impact Nashville commercial real estate trends for 2022? Keep reading to learn about pro tips for adopting and complying with new lease accounting standards in Nashville.

For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.

A Closer Look at The New Lease Accounting Standard

ASC 842 requires companies and organizations who lease assets to recognize lessees with terms greater than one year on their financial balance sheet. This includes assets and liabilities concerning their specific rights and obligations. The new requirements focus specifically on the implementation of new processes such as:

  • Technological Upgrades
  • Training
  • Greater Detail in Reporting
  • Technical Accounting Responsibility & Assessments

The standard was set for public entities for December 15, 2018, and 2019. The FASB voted to delay the adoption and transition deadlines for annual financial reporting periods to post-December 15, 2021.

Meeting New Standards for Assessing & Reporting Leases

Critical changes in how leases are assessed and reported on balance sheets include the classification of leases and the capitalization of operating leases. Dedicated teams need to be put into place right away to evaluate leases under the organization's control. Characteristics to consider include the evaluation of:

  • Existing Variable Lease Payments
  • Current Renewal, Termination, and Purchase Options
  • Types of Initial Direct Costs
  • Residual Value Guarantees
  • Existing Service Contract Leases

Planning teams need to arrange to have organizations with management and relevant stakeholders to obtain their approval of the transition method and its planned approach. Together, plans should include obtaining initial recognition by leaseholders concerning rights and liabilities being put into place.

Identify Lease Population & Evaluate and Record Lease Contracts

Determine the organization's lease population and consider their scoping approach about the new standards. This allows teams to discover operating leases not previously included on the balance sheet.

Once identified, each lessor contract should be evaluated for terms and data elements such as recurrent payments, expiration dates, and other embedded contractual promises and service arrangements. The team will consider handling any upcoming deadlines for negotiating and executing pre-set or new terms.

There are still more lease considerations. Are they finance or operating leases? What are the associated costs in the lease exempt versus recordable? The answers to these questions will impact financial reports such as operations, balance sheets, and cash flow statements.

By identifying the status and arrangements of existing and expiring leases and their population, organizations needing to comply with new lease accounting standards can find optimal ways to do so. Experts can advise organizations on whether they should take a portfolio or contract-by-contract basis approach with leases in the future.

Meeting New Lease Standards & Financial Accounting

Unlike finance leases, accounting for operating lease contracts is considerably different under the new standard protocol. In the realm of financial considerations, organizations and their teams in charge of implementation should focus heavily on a few critical areas of operations.

This will involve calculating gains and losses due to lease extensions, renewals, and early terminations with clause considerations. Identify lease payments, including their initial direct costs. Don't forget to factor in any incremental borrowing rates or discounts to determine the present value of finance and variable operating lease payments, including purchase options.

Companies will need to be prepared to present the appropriate financial statements and disclosures, which entails a significant bit of effort, time, and attention to detail. However, organizations that diligently prepare to implement the new standards will more easily transition into compliance.

The Post-Implementation Phase

After adopting ASC 842, organizations must comply and ensure that all operational requirements are met per the changes. This will mean that all efforts must be taken to educate financial personnel and others involved in keeping records about updates in policies. This will likely involve providing teams with the knowledge they need to use modern programs and software for accounting practices that are continually evolving.

Identifying new business systems for streamlining processes such as ledger accounts and disclosure preparation helps identify the organization's compliance records. These reports can assist with the creation of new post-implementation of internal policies and controls.

Handle ASC 842 Changes With Ease

The more leases and transactions in an entity or organization's portfolio, the longer it will take to adopt ASC 842's New Lease Accounting Standards fully. This transition takes time and is approaching quickly.

Get started right away by contacting the advisor or advisors of your portfolio or hiring an entire team of professionals familiar with operational compliance. Put top teams in place to manage each phase and enact all necessary processes and procedures for submission to make commercial renting a streamlined process.

For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.

 

Gary Ashton

The Ashton Real Estate Group of RE/MAX Advantage

The #1 Real Estate Team in Tennessee and #2 RE/MAX team in the World!

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