By LeaseCrunch® on September 14, 2021 at 2:44 PM
What does ASC 842 do? The new ASC 842 standard for lease accounting requires all leases longer than 12 months to be recorded as assets and liabilities on balance sheets. The Financial Accounting Standards Board, or FASB, created this new standard to foster more transparency between investors and companies. ASC 842 replaces the previous lease accounting standard, ASC 840, under which certain leases could be classified as “operating leases” and written off as operational expenses. As a result, they were excluded from calculations such as return on assets, and these exclusions could give an investor a false depiction of a company’s performance. With ASC 842, all organizations following generally accepted accounting principles, or GAAP, are required to categorize all leases as both liabilities and right-of-use assets.
What is ASC 842 Lease Accounting?
With the adoption of ASC 842 comes significant impacts on the balance sheets of many companies. Companies lease far more than simply office space. Leased assets can include computers, telephones, vehicles, heavy equipment, and warehouse space. Not to mention, leases can be embedded into service and usage contracts as well as amongst other expenses, proving difficult to find. Finding all of these leases and recategorizing them will be a headache for many companies as they implement the new lease accounting standard, especially those with decentralized operations. Learn more about transitioning leases here.
What is ASC 842 Lease Calculation?
Previously, under ASC 840, accounting for operating leases was easier than accounting for capital leases because lease payments were expensed as they were paid. A capital lease under ASC 840 is similar to a finance lease under ASC 842, including the definition and calculations. The concept of an operating lease also remains the same, with a big difference: the present value of committed future payments must be recorded on the balance sheet as a lease liability, offset by a right-of-use asset.
After entering into and properly booking a lease, something about the lease might need to change. For example, a tenant adds or reduces the square footage of the space they are renting, a vehicle is damaged, or equipment is returned early. Depending on the facts and circumstances of the lease revisions, ASC 842 might consider the revision a modification, a remeasurement, or an impairment. Each of these requires different inputs for the lease calculation to be updated, which can be difficult and confusing. Learn more about how you can help prepare your clients for these changes here.
Is IFRS the Same as ASC 842?
When it comes to operating leases under IFRS 16 and ASC 842, IFRS 16 and ASC 842 diverge in intent and effect. Under IFRS 16, there are only finance leases - the International Accounting Standards Board eliminated the concept of the operating lease. In the U.S. under ASC 842, organizations still need to classify leases as either operating or finance leases. Despite this difference, both require all leases over 12 months in length to be recorded on the balance sheet.
When is the Effective Date for ASC 842? When is ASC 842 Effective for Private Companies?
ASC 842 goes into effect for the annual reporting periods of private companies and nonprofit organizations after December 15, 2021. This date was delayed to allow organizations some accounting relief during the height of the COVID-19 global pandemic. Read more about how the pandemic affected leases here.
What is the Best ASC 842 Software?
To properly adjust to the changing scene of lease accounting, companies will benefit significantly from investing in a software solution to manage their transition to ASC 842. When in the market for ASC 842 lease accounting software, it’s important to look for a solution that hits several main areas of focus:
- Efficiency: Manual calculations take time, especially with more intricate lease accounting standards. Software can crunch numbers and save you money and time.
- Ease of use: Software should simplify implementing the new standard, not make it more confusing. Look for a platform that has a user-friendly interface for ease of use and integration.
- Customization and control: Look for a software solution that scales to your organization and is modifiable based on the features you want.
- Security: Choosing a technology that is secure is just as important as choosing one that is fast and accurate.
- Expertise: select software created by a team of accounting experts, not just software engineers. Here at LeaseCrunch, we specialize in accounting and software solutions to ease the burden of lease accounting on your firm.
LeaseCrunch is the best option in the lease accounting software space. Our software is efficient, reliable, and affordable while helping your company maintain accounting compliance and accuracy. Get a demo today.