Watch a recording of our most recent Lease Standards Event as Andrew Donohoe, Shareholder with VonLehman CPA & Advisory Firm, gives an update on the new lease standard requirement, including what you need to know going forward.
In June 2020, when the Financial Accounting Standards Board (FASB) extended the compliance deadline for private companies and nonprofit organizations by releasing Accounting Standards Update (ASU) 2020-05, Leases (Topic 842), most of the private accounting world rejoiced. Unfortunately, it appears there will be no further extensions on the implementation of this standard. Additionally, you must implement for years beginning after December 15, 2021.
This article will provide a refresher on the standard, point you in the direction of creating an implementation guide for your business, and provide some additional advice on communication with the users of your financial statements.
Summarizing ASC 842
ASC 842 was introduced to address what was perceived to be a longstanding issue, non-balance sheet lease transactions. To comply with ASC 842, private companies and nonprofit organizations must include lease commitments as part of their balance sheet. These new balance sheet items will be recorded and entered as ‘right of use’ assets and lease liabilities and amortized over the life of those leases. In the past, only capital leases were to be included on the balance sheet. However, under the new standard, leases greater than twelve months in length must be reported regardless of whether they are classified as operating or capital. Under 842, significant changes could occur to the balance sheet and the financial ratios derived from the financials. Those changes could have an impact on the financials ratios of the company. These changes and communication with your financial users are discussed later in this article.
How Should You Prepare?
The first step is to become familiar with the new lease standards. As you become comfortable with the requirements of the standard, it would be beneficial to your company to develop an implementation guide. As part of this guide, organizations need to include steps such as identifying leases, adjusting and creating new workflow processes, and establishing new monthly close processes, among others. Full implementation guidance can be found on the FASB website. Next, you need to evaluate your current software platform. If your current software is unable to handle lease accounting, it is advised that you upgrade to a more sophisticated accounting program or determine which third-party software you would like to use in order to be confident you are properly disclosing leases under the new standard. There are dozens of third-party lease accounting software programs which assist with implementation, journal entries, disclosures and many other pertinent items required by ASC 842.
Additional Communication with Financial Statement Users
The changes from ASC 842 have the potential to create issues related to certain financial statement ratios and covenants. Before any statements are issued, we suggest you have a conversation with the users of your financial statements. This is especially important if your covenants will be impacted. Just recently, VonLehman saw the first example of a financial institution adjusting their covenants to exclude the assets and liabilities created by ASC 842. Proactive discussions before renewal could help you get this language added as well.
Adopting new standards can be an overwhelming project for many organizations. VonLehman’s experts are knowledgeable and experienced at guiding clients through the adoption and compliance process. We can provide additional information related to ASC 842 specific software platforms, point you in the direction of helpful implementation guides, or assist in tracking leases using our own software.
For additional guidance on lease standards or any other accounting topic your entity is facing, contact us today at adonohoe@vlcpa.com or 800.887.0437.
