By LeaseCrunch® on February 9, 2022 at 12:34 PM
The Private Company Council (PCC) and the Small Business Advisory Committee (SBAC) recently met and discussed the implementation of ASC 842, including systems and accounting resources, utilization of FASB educational materials, population of leases, and strategies for educating financial statement users. Those who have already implemented ASC 842 discussed their experiences and shared best practices. One of the main themes was to get started early. In this blog post we respond to the key topics and takeaways from the meeting.
Don't delay start preparing today
The CPA firms we work with at LeaseCrunch understand that the earlier their clients get started, the easier it is to implement the new lease accounting standard. Having been busy accountants ourselves, we know how tempting it is to wait until the last minute to begin.
Clients only need to apply much of the new lease standard judgment on a go-forward basis, with the full standard applying to new leases starting after the initial application date. When your clients first enter into a lease agreement, the terms are top of mind for them because they are actively working with the contract. This is the best time to find and collect the relevant lease information and determine the correct inputs. If your clients wait, it becomes a more daunting and intimidating task.
Start inter-department communication now
Another tip for clients is to begin communicating with other departments now. The new standard will change the way your clients’ internal processes work. To avoid last-minute information requests at year-end, accounting departments can explain their needs up front and implement mid-year reviews to ensure the right habits start early. Whether it is a leader of a department, a branch manager, or procurement, they now need to communicate with the accounting group for more than lease payments.
Think about an organization with field sales representatives who drive leased company cars. Previously, the accounting department simply paid the bill when it was due. Now, the accounting team needs the lease documentation to properly record it on the balance sheet.
The committee members also discussed some of the challenges with ASC 842 including embedded leases, determining the incremental borrowing rate, and technology challenges including considerable time needed to integrate the software and a lack of accessibility to software vendors. We will address each of these important topics, one by one.
While identifying embedded leases can be tricky, there are tools that help simplify the process. For example, our free embedded lease identifier tool walks your clients through 5 questions to give them a definitive answer as to whether their contract contains an embedded lease. We’ve also written this blog that breaks down:
- What an embedded lease is;
- What makes a lease an embedded lease;
- How prevalent embedded leases are and;
- How to account for an embedded lease
Incremental borrowing rate
Under the new lease standard, the lease liability is the present value of committed future payments, which means you need to identify what discount rate to use. The standard prefers your clients to use the rate implicit in the lease, but that is rarely readily available. As an alternative, clients can use an incremental borrowing rate, which is the rate at which they would borrow funds to purchase that asset over the same length of time.
While that can be complicated, there is some good news: the new lease standard allows non-public clients to use a risk-free rate, which is much easier to determine. Of course, that rate is likely to be lower and therefore can result in a higher lease liability on the books.
There is more good news: recently, the FASB decided to allow organizations to use different types of rates based on asset class. As a result, an organization might choose to determine an incremental borrowing rate for their office space lease, where the resulting lease liability is likely to be more material. Then for vehicle or copier leases, they can use the easier-to-determine risk-free rate, where the difference in rates is likely to be immaterial.
Accessibility to software vendors
When your clients are ready to implement, easy-to-use and cost-effective software is readily available, and it’s designed for companies with one lease or thousands of leases. Your clients do not have to do this alone. With LeaseCrunch, they can be up and running in a day, where accurate journal entries and footnote disclosures are available with the press of a button.
With the abundance of tools, resources and technology available, implementing the new lease accounting standard will be manageable. The most important piece is for clients to review their leases and collect the required information now.
LeaseCrunch is here to help. We work with CPA firms to:
- Expedite your clients’ lease accounting
- Keep clients compliant with ASC 842, GASB 87, GASB96 and IFRS 16
- Create error-free amortization schedules and journal entries
- Get step-by-step wizards to complete worry free calculations that comply with the new lease standard
- Save time with comprehensive policy templates that are designed to kick-off implementation
If you’d like to learn more about LeaseCrunch, request a demo today.