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Preparing for the Updated Lease Standards

04/27/2021 Andrew Donohoe

The impact of the COVID-19 pandemic has required businesses to navigate through rapidly changing environments and regulations like never before. The Financial Accounting Standards Board (FASB) recognized the impact of COVID-19 on private businesses and organizations. As a result, Accounting Standards Update (ASU) 2020-05, Leases (Topic 842), was released in June 2020, extending the compliance deadline for private companies and nonprofit organizations.  The standard is now effective for fiscal years beginning after December 15, 2021.  However, despite the standard implementation being postponed by a year, now is the time to be working towards compliance and understanding of the standard so that you are fully prepared for implementation.

Summarizing ASC 842

ASC 842 was introduced in 2016 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 both lessee and lessor lease commitments as part of their balance sheet.  These new balance sheet items will be recorded and entered as ‘right of use’ assets 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 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 that may be derived from the financials.  Therefore, we suggest companies assess those changes in 2021. It is important that you work with the users of your financial statements to determine their understanding of the changes and potential issues as they relate to certain items such as loan covenants and other financial statement ratio requirements.   

How Should You Prepare?

The first step is to become familiar with the new lease standards. As part of the adoption process, organizations will have many considerations including: identifying leases, adjusting and creating new workflow processes, and establishing new monthly close processes, among others. A full update can be found on the FASB website.  Furthermore, now is the time to evaluate your current software platform. If your current software is unable to handle lease accounting, you’ll need to upgrade to a more sophisticated program or determine which add-on software you would like to use in order to be sure that you are properly disclosing leases under the new standard. 

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 on certain ASC 842 specific software platforms to use internally, point you in the direction of helpful implementation guides or provide assistance 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.

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