By LeaseCrunch® on Nov 11, 2019 1:58:04 PM
MILWAUKEE, November 11, 2019 – LeaseCrunch, the only lease accounting software made by former CPA firm auditors for CPA firm auditors, says that improperly recorded ASC 840 leases by public companies is the biggest takeaway no one’s talking about from the new lease standard.
“In working with public organizations who have implemented the new lease standard, no one is talking about this one important reality,” said Ane Ohm, CEO of LeaseCrunch. “Many organizations did not properly record leases under ASC 840, the predecessor to the new lease standard, and this complicates their implementation for the new lease standard, which is ASC 842.”
Why care about the old standard if we’re moving to a new lease accounting standard? Two words: practical expedients.
“Practical expedients are designed to simplify the new lease standard implementation,” said Ohm. “The FASB offers transition relief that includes the “package of three”: you do not need to reassess existing leases for classification (operating vs. capital-soon-to-be-finance lease), completeness (assuming you’ve properly identified all leases under the current lease standard), and indirect costs (the definition changes from the current standard to the new standard and no one wants to go back and reconsider these costs).”
These practical expedients can save a lot of time, especially for longer-term leases where finding original information would be a challenge. However, these practical expedients must be applied to leases that have been accurately recorded under the current lease standard, ASC 840.
Where organizations went wrong with ASC 840—and why it matters now
“The new lease standard requires that operating leases be recorded on the balance sheet, which wasn’t mandated under ASC 840. At the same time, ASC 840 did require operating leases to be disclosed in footnotes, which are important and yet not on the “face” of the financial statement,” said Ohm.
Unfortunately, many organizations did not properly identify and record all of those leases under ASC 840. The result is that public companies underwent far more effort to identify and analyze leases than anyone originally anticipated.
Here are the main areas impacted by not fully implementing the previous lease standard:
1. Lease identification
Identifying all leases has been a significant challenge, particularly for organizations with multiple locations. If the current lease standard was properly implemented, these leases would already be tracked and this wouldn’t be such a monumental effort. Identifying all leases, which can include more than contracts that are labeled as a “lease,” should be the top priority for non-public companies when preparing for their ASC 842 implementations.
2. Embedded leases
The concept of embedded leases – a service contract that contains a leased asset – has resulted in the review of thousands of contracts to ensure proper accounting under the new lease standard. Again, if the current lease standard was properly implemented, these would already be included in disclosure numbers.
3. Lease terms
The current lease standard provides that a lease term should be “reasonably assured,” the definition of which is quite similar to “reasonably certain” under the new lease standard. This means that organizations should already be disclosing payments on renewal terms and/or stopping payments related to termination clauses for which there are solid economic incentives to exercise.
“With the delay in non-public company compliance, private companies and other organizations can learn from public company mistakes and should allow themselves enough time to conduct lease identification, research, and analysis in order to implement ASC 840 correctly,” said Ohm.
Named by Accounting Today as one of the top new products of 2019, LeaseCrunch provides cloud-based lease accounting software for CPA firms, designed to help organizations implement the new lease accounting standards, ASC 842 and IFRS 16. Designed by CPAs, former Big 4 public accounting auditors, software development veterans and a former member of the FASB staff, the application offers an easy-to-use customer interface that delivers “audit in a box” lease accounting services, reducing the time it takes clients to prepare for an audit. LeaseCrunch allows companies to identify policy elections for the leasing standard through templates for both US GAAP and IFRS. For more information go to: www.LeaseCrunch.com
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John Steven Vita Communications