If you're involved in property or equipment leasing, you understand that there are several standards that your company must adhere to for compliance. These standards come from either the government or independent regulatory bodies.
One of the lease accounting standards that enterprises must adhere to is the FASB ASC 842. This is a new standard on a lease established in 2016 that became effective in December of 2021. This is the right place if you're looking to familiarize yourself with the ASC 842 lease accounting standard. Please keep reading to understand ASC 842, from its establishment and purpose to its effective compliance date and the changes it introduced to existing standards.
What Does ASC 842 Entail?
ASC 842 is an accounting standard issued by FASB to provide companies with financial reporting and accounting guidelines. Often referred to as the Topic 842, ASC 842 was established with the goal of:
- Encouraging transparency in the accounting of liabilities that result from leasing arrangements
- Streamlining and organizing the accounting process for leases under US GAAP
- Abolish off-balance sheet activities in lease agreements
History of the ASC 842
The ASC 842 is a new lease standard released to update the previous ASC 840. Through the ASU 2016-02, FASB released the much-anticipated guidelines in an attempt to make up for the loopholes left by the ASC 840. In short, the ASC 842 was established in February 2016 but wasn't meant to become effective until later. It would receive several updates in the coming years, even after its eventual implementation.
Through the ASU 2016-02, the FASB provided accountants with new guidelines on lease agreements and offered first-hand information on when enterprises would be required to adhere to the new standard. As the accounting profession continued to drive its agenda of promoting transparency for financial statement stakeholders, it saw it right to update previous standards to make it mandatory for leases to be included in the balance sheet.
Why Was the FASB ASC 840 Replaced with ASC 842?
Under the prior ASC 840 leasing standard, many companies didn't record their leases in the balance sheet, and those that included them in financial statements did it in the footnotes. For example, the operating lease was considered an off-balance sheet transaction. This is even though an operational lease is a form of liability that should be displayed to help those using the balance sheet determine the amount, timing, and the risk associated with cash flows from leases.
The new ASC 842 standard requires companies to record all their leases on the balance sheet. Its goal is to reduce off-balance sheet leasing activities, thereby improving financial reporting and transparency across various enterprises. The lease standard also requires companies to disclose vital information about their lease agreements to multiple stakeholders, including the investors. Adoption of the ASC 842 is mandatory for all companies.
Business owners expect ASC 842 to widely impact their operations since they'll be required to include all leases in their financial statements. The sad part is that the ASC 842 lease standard's impact will be felt across the board, not just in the accounting department.
The ASC 842 Compliance Date
According to the FASB, public and private companies have different adoption dates. For public companies, the adoption of ASC 1842 began on December 15, 2018. Since this was the end of the calendar year for many companies, public organizations adopted the new standard on January 1, 2019.
ASC 842 Compliance Date for Private Companies
The adoption date for private companies has been delayed year-in, year-out since 2019. As per the FASB ASU 2016-02, Topic 842 was supposed to go into effect on December 15, 2019. This meant the reporting period was expected to start on January 1, 2020.
However, this didn't happen as in October 2019; the FASB didn’t announce the adoption delay for private companies and non-profit organizations until later. Many companies requested the FASB to provide them additional time to put their things in order. And since the FASB knew that the implementation needed more time, it decided to push the adoption date forward.
It was expected that all private companies and non-profit organizations would adopt the ASC 842 on December 15, 2020. However, in June 2020, the ASU 2020-05 ASC 842 delayed the adoption until December 15, 2021. This delay was meant to provide companies with accounting relief amidst the COVID-19 pandemic.
Therefore, the official compliance date for non-profit organizations and private companies was after December 15, 2021. Companies that make reports after a calendar year had to adopt the ASC 842 effective January 1, 2022. This means that private companies will be required to make their financial reporting as per the new ASC 842 for the first calendar year as of December 31, 2022.
What Things Should Companies Be Thinking About In Preparation for the Transition?
Companies with massive lease portfolios face substantial implementation challenges in areas such as policy development, technical accounting, lease data management and extraction, and internal controls, reporting, and implementation. In readiness for the transition, companies should:
- Consolidate lease agreements in a centralized location
- Consider hiring a third-party leasing software like iLeasePro to help with compliance
- Conduct more audit scrutiny and validate the leasing data for accurate reporting
- Search for past unrecorded leases and devise practical ways for expedited accounting and reporting
- Foster accounting policy updates
- Provide disclosure updates
While all this information is helpful, only a lease abstract will be able to get you to where you want without wasting your valuable time. It reveals the path to follow to get information crucial to the business. It makes the roadmap to critical data short and uncomplicated.
As the due date for the first calendar year for ASC 842 adoption edges closer, companies should be setting up their internal systems for implementation. Most companies are still underestimating the actual work that goes into adopting the ASC 842 lease standard fully.
However, for those who understand compliance requires considerable time and planning, partnering with lease management software solutions is the way forward. Finding a lease accounting software solution will help you navigate the murky waters of lease standards compliance seamlessly within the set time frame.
iLeasePro is a perfect example of a cutting-edge lease accounting software system that will help you adhere to lease standards, improve accounting accuracy, reduce data entry errors, and enhance reporting. That way, your company can disclose lease agreements to stakeholders, cut costs, and improve budgeting and forecasting.