When the changes in an accounting standard impact assets or liabilities, we are accustomed to the difference flowing through equity. The new lease standard, ASC 842, is different because equity is not typically impacted in the initial journal entries. It might seem strange to not use your trusty “Cumulative Effect of a Change in Accounting Principle” account when implementing a new standard, yet it’s true - and important to know to ensure that your lease assets and liabilities are properly recorded. So how does it work? Read on to learn more.
As we kick off 2019, everyone posts predictions for the coming year and I enjoy reading those as much as the next person. With the new lease standard, it seems that predictions are more along the lines of, “the sky is falling!” There are only so many times we can hear that we’re in dire straits, so I thought I’d shake it up a bit.
Understanding the reality and the timeline of the new lease standard, what do I want to happen in 2019? Read on for my wishlist.
If your organization leases just about anything and follows Generally Accepted Accounting Principles (GAAP) in the United States or International Financial Reporting Standards (IFRS) elsewhere, then the new lease standard affects you.
If you’re affected, then you need to know certain key dates, starting with the date by when you have to adopt the new standard.
Important note: This is a judgment-based standard, which means there are few hard-and-fast rules and the treatment of your leases will depend on your unique situation. It's important that you always double-check decisions with an accounting professional who knows your circumstances. This blog should not be considered or take the place of professional advice or services.
We’re excited this month to share insights from our recent conversation with industry expert John Hepp. John is a retired partner from Grant Thornton and a former FASB project manager. He holds a PhD from the University of Wisconsin-Madison and is currently on the faculty at University of Illinois at Urbana-Champaign.
John discussed several nuances of the new lease accounting standard, from practical expedients (“the spoonful of sugar to help the medicine go down”) to discount rates and much more.
Have you spoken with your clients about the new lease standard? How many clients have begun preparing for implementation? Since the new lease standard doesn’t go into effect for another year for non-public organizations and most are still dealing with the new revenue recognition standard, we’re hearing that many haven’t put much effort into preparing for the new lease standard.
Given the time-consuming nature of implementing the new lease standard, it’s essential that any client with leases considers developing an implementation plan sooner rather than later. Because your firm will be more frequently interacting with clients in the next few months, it’s a perfect time to bring the new lease standard into the conversation.
In this blog, we’ll offer suggestions for having these discussions in conjunction with your assurance work to help you best prepare your clients for this significant change.
On July 30, 2018, the FASB issued a greatly anticipated ASU related to the new lease standard. ASU 2018-11, Leases (Topic 842), Targeted Improvements, has two provisions that are intended to make transition to the new lease standard easier and less costly. One is an additional transition method, providing transition relief that will be of great interest to lessees and lessors. The other provides a new practical expedient for lessors in their identification and separation of lease components.
The new lease standard, ASC 842, changes the treatment of common area maintenance (CAM) within a real estate lease contract. Many real estate leases include some form of CAM, such as cleaning a building lobby, snow removal, landscaping, or janitorial services. Here are some things you need to know about CAM, including what is changing and a few practical examples.
Policy elections that must be made under the new lease accounting standard are a critical part of implementation planning. They impact your clients’ future accounting and financial statement disclosures and your clients may not have even considered them yet. For example:
- Do they understand the difference between lease and non-lease components?
- Do they know that there is a short-term lease exception available?
- Do they know how they want the presentation of lease assets and liabilities on their statement of financial position to appear?
- Do they know that there are a number of practical expedients available that can save them time, but that they must elect them?
Lease accounting is applied at the lowest asset component. As a result, after you have identified the lease and nonlease components, you as the lessee should determine if the lease contains more than one lease component. You will do this by identifying the individual asset units and their relationships.
You determine if a lease has separate lease components by considering the interdependencies of individual assets covered in a contract. A key consideration is whether the supplier will use multiple assets, or a group of assets that work together, to fulfill the arrangement.
For example, if a customer leases 15 computers and monitors from a technology supplier, then there are clearly multiple assets involved in fulfilling this arrangement.
Is there one or many leases?
Identifying lease and nonlease components
Not all costs related to a lease are included in the leased asset and liability. For example, a lessor may lease a truck and also include a provision to operate the truck on behalf of the lessee. Providing a driver, maintenance and gas are not related to securing the use of the truck and these costs would be considered nonlease components. Another example of a nonlease component is the fee for common area maintenance when renting office space.