By LeaseCrunch® on February 10, 2022 at 12:37 PM
The Financial Accounting Standards Board met on November 10, 2021 and decided not to further defer the new lease accounting standard implementation date for nonpublic companies. What does this mean for CPA firms and their clients? It’s time to get started! And we are here to make it even easier for all of you.
Implementing the new lease accounting standard is not a one-time exercise; it requires changes to processes and reporting controls. The sooner companies get started the easier it will be.
An early priority is making sure clients assess the accounting policy elections and the practical expedients available to simplify implementation. By adopting the “package of three” practical expedients for leases that exist on the initial application date of the new lease standard, your clients limit the information needed to comply with the new lease standard because:
- Lease Identification: No need to examine existing contracts to determine if they contain a lease under the new lease standard.
- Classification: Do not need to reassess whether the lease should be classified as operating or finance under the new lease standard. Instead, if you properly classified the lease as “operating” under ASC 840, it is “operating” under ASC 842. If a “capital” lease under ASC 840, is a “finance” lease under ASC 842.
- Initial direct costs: Despite the change in definition for initial direct costs, you do not need to reassess these costs for existing leases.
With the adoption of the “package of three” and easy-to-use software, clients can be quickly ready for the new lease standard. For transition leases, which are the leases that exist on the initial application date of the new standard, they only need to collect the following information:
- Lease term, which should consider early termination and renewal provisions
- Asset details: type, description, and location
- Lease classification: If capital lease under ASC 840, then finance. Operating lease remains operating
- Discount rate, either the federal risk-free rate or your collateralized borrowing rate (FASB is considering allowing this determination by asset class)
- Lease payments after the initial application date, including termination penalties, bargain purchase options, renewal term payments, residual value guarantees
- Existing balances for this lease on the balance sheet as of the initial application date, including deferred rent and capital lease asset/liabilities
Develop a process for the accounting department to review lease data in new lease contracts
ロKey dates: commencement, termination
ロLease term, early termination, and renewal provisions
ロAsset details: type, description, and location
ロPayment terms, termination penalties, bargain purchase options, renewal term
payments, residual value guarantees
ロLease incentives and initial direct costs
Variable lease payments tied to sales or an index receive special treatment:
ロVariable payments tied to sales are expensed
ロIf payments are tied to an index, use the index at lease start date to calculate lease payments. Changes in the index are expensed.
ロUseful life of the asset to determine amortization period, e.g., right-of-use (ROU) asset life
ロOther important data to track, such as taxable vs. nontaxable leases
Evaluate existing lease business processes
ロWho is responsible? Are current resources sufficient?
ロAre areas other than Accounting involved (Procurement, Legal, Treasury)?
ロIs lease processing and record retention centralized or decentralized?
ロIs the team ready with an easy-to-use software that provides import-ready journal entries and quantitative footnote disclosures with the push of a button?
Review new accounting and disclosure requirements, including judgment areas
ロAccounting for leases created after implementation using the new standard
ロProcess for determining classification criteria, including the fair market value and
economic life of the lease asset
ロAccounting policy elections and practical expedients, including lease vs.
non-lease components, short-term leases, and leasehold improvements
ロDetermine how ROU Assets and Lease Liabilities will be disclosed on the financial
statements; separately in a footnote, or within the balance sheet and income statement
itself. For new disclosures, consider data location and whether it is reliable and auditable
ロHow will discount rates be determined and applied by Accounting? ASC 842
provides a policy election to use a risk-free rate and is considering making this determination by asset class.
Discuss the new standard with
ロThe board or owners
ロThe audit committee
Click here for a copy of this checklist you can share with clients.
Most organizations have 20 or fewer leases, and with all of the resources including lease abstraction tools, embedded lease identifiers, checklists, guides and calculators to support your clients’ efforts, implementation is going to be easier than you think.
When clients are ready to implement, easy-to-use and cost-effective software is available. With LeaseCrunch, you can be up and running in a day, where accurate journal entries and footnote disclosures are available with the press of a button. Because spreadsheet formulas are easily corrupted and introduce risk, your audit fees may increase when your clients’ calculations have to be double checked.
It is important to understand that most companies have straightforward leases and implementing the new lease accounting standard will not be overly difficult. Your clients shouldn’t be scared and shouldn’t push it off. As long as they utilize the tools, resources and the knowledgeable experts available, this will be manageable. We are here to help! If you are interested in learning more about LeaseCrunch, schedule a demo today. It's LeaseCrunch time!