By LeaseCrunch® on June 28, 2021 at 6:04 PM
With the new lease standard implementation date approaching, how are firms helping and encouraging their clients to be prepared in a timely manner? This was a topic of discussion at the 2021 CPAmerica A&A conference last week in Denver.
There was no shortage of conversations in regards to ASC 842 at the event. We heard from firms that they want to determine how to best help clients navigate through the transition now. With the implementation date quickly approaching, it’s no surprise that lease accounting is an area of focus for CPAmerica’s members.
So how are CPA firms navigating the new lease accounting standard landscape? Here are some of the recurring themes and key takeaways that emerged from the event:
Clients need help transitioning existing leases from ASC 840 to ASC 842
When there are changes made to the accounting standard that impact assets or liabilities, we normally see the difference flowing through equity. With ASC 842, equity is not typically impacted in the initial journal entries.
Before transitioning to ASC 842, your clients should start by ensuring they are compliant with ASC 840. If their leases are complete and accurate under ASC 840, it will ease the transition process because they can utilize available practical expedients for ASC 842.
Three common mistakes under ASC 840 are:
1. Incorrectly classifying operating versus capital leases
2. Not identifying reasonably-assured terminations or renewals when including future committed payments on the maturity schedule
3. Excluding some operating leases, such as embedded leases, on the footnote’s maturity schedule
To help clients prepare, share this side-by-side financial statement view of capital and operating leases, before and after the new standard. This will help them visualize the differences from ASC 840 to ASC 842.
Maintaining independence while helping clients implement the new lease accounting standard is key
Clients rely on you to provide expertise and guidance and you want to ensure you maintain your independence while working with them. While each firm makes its own determination when considering independence issues, there are some considerations to keep in mind:
- You can provide guidance on the new lease standard, how to make policy decisions, how to abstract needed information from a lease document, how to transition leases on the books, and other key details.
- If a client lacks the resources to implement the new lease standard, you might assist with data entry. In this situation, you can then require client review and a management assertion about the accuracy of lease inputs.
If you use software to help clients implement the new lease standard, you will want to ensure the system complies with AICPA guidelines for hosting services.
Debt covenant implications
The new lease accounting standard adds a right-of-use (ROU) asset and lease liability on the balance sheet for operating leases. This could put a client in violation of one or more debt covenants. Clients need to understand what the implications are of their financial statements and how added liabilities affect debt ratios. Firms should encourage clients to talk to their bank to ensure debt covenants are written so that they remain in compliance even after adding leases to the balance sheet.
Related Party Transactions
ASC 842 provides clear guidance about related-party leases: use the legally enforceable contract terms to calculate the ROU asset and lease liability. Economic incentives remain important when assessing the reasonably certain length of the lease, but a relationship between parties is not a factor. Related party transactions still need to be separately disclosed.
It can be overwhelming for clients to prepare for the new lease standard. If you’d like to get a jump start on helping yours get ready, feel free to share this roadmap with them. If you’d like to learn more about how LeaseCrunch helps simplify the new lease standard for you and your clients, request a demo today.