asc 842 lease accounting

asc 842 lease accounting

Importance of ASC 842 Lease Accounting

1. Overview of ASC 842 Lease Accounting

The standard applies to companies that follow U.S. Generally Accepted Accounting Principles (GAAP), as well as lessees for leases of property, plant, equipment, and intangible assets. For some companies, these changes to the lease standard can cause a significant impact on accounting and financial reporting. The primary reason for ASC 842 is that it requires the lessee to recognize assets and liabilities initially for nearly all leases. This has a certain impact on profit-and-loss which could change depending on the model chosen by a company. The standard is highly impactful. Furthermore, the standard provides many transition requirements and practical expedients to alleviate the burden of changing leases on accounting and reporting operations of the company. This includes the transition or the effective date of the standard, which was beyond 2019 for public companies and beyond 2020 for those designated as private companies.

All companies must comply with ASC 842 by 2021. The basic principle of ASC 842 is that a right-of-use asset and a lease liability are recorded at the lease commencement date. Additional triggers for recording a lease are when it’s not likely that the lessee will purchase the underlying asset, the lease terms are not documented, and the lessee has the right to extend or terminate the lease and associated payments at the customer’s owner. Under ASC 842, immaterial items do not have to be recorded, but the entity still pays in accordance with the lease agreement. An example of an immaterial item would be if a company is leasing a chair under a lease agreement, that does not have to be recorded under ASC 842 because of its materiality.

2. Benefits of Implementing ASC 842

On the road to ASC 842 compliance, some of the strategic benefits that retailers and companies in other industries can derive from the use of SCCM 1907 include the ability to add to class-leading compliance and audit performance, the ability to leverage a short deployed time-frame to ameliorate design and development work on lesser-known legacy computing (including hardware) frameworks, the ability to channel more talent and resources toward core business objectives when they focus less on compliance projects, the ability to utilize machine learning and AI-enhanced SCCM 1907 feature sets to gain insights for optimizing CRE productivity, and the ability to leverage specialized market creation capabilities of SCCM 1907 to test, for example, B&M lease abatement applications to support the organization’s needs for re-envisioning strategies.

Accounting method changes are relatively easier to do, as they involve one-time steps such as training, customization, configuration, and analytics, for example. However, the long-term consequences of an accounting method change can be onerous and highly limiting for organizations. For example, a change in accounting method from capital to operating lease has been known to significantly lift the cost of compliance. In the aftermath of SOX, as per leasing software industry sources, many Fortune 100 public companies kicked off implementation of the required changes in early 2006, with some companies even targeting implementation well before required compliance to expedite the process of proving compliance during SOC-mandated IT audits of financial disclosures. Fast forward to 2018-2019 and many retailers (representative of a number of industries) are undergoing rigorous ASC 842 compliance.

This blog post continues from “What is in SCCM 1907 that can help you with your review of ASC 842 Lease Accounting?” In this blog post, we discuss marketing dynamics that, over the long term, make ASC 842 implementation critically important to U.S. public companies, AISI International’s ASC 842 assessment services, and 6 key benefits that organizations can avail of when they implement ASC 842 on time. A summary of SCCM 1907 Lease Reports is also provided below.

3. Challenges in Adopting ASC 842

Monitoring and managing internal resources allocated to the project was reported to be one of the top five rated challenges during transition. Another disadvantage for smaller entities would be the absence of internal technical accounting resources to support them during adoption. Many report that few or no outside CPAs skilled in the new standards are available for scheduling, implementation, and problem-solving. For some, the lack of standard software could also hinder the option to hire outside support for transitioning into the new standard. That being said, entities may source professionals to support critical activities in the adoption process from public accounting firms. This significant resource constraint limits the option of an approach that mirrors larger companies, which have full-time, dedicated project teams equipped with additional technology resources to process and handle the set of complex lease data in conformity with the impending ASC 842. The real challenge in the project’s implementation is the fact that most companies would need time to strategically reassess how best to manage their financial obligations through the reduction in borrowing funding through leasing. We argue that lease accounting for most companies, whether operating or financing, will affect decision-making to some degree, due to concerns about the financial implications and the impact on existing contracts with clients and suppliers.

Among the challenges of ASC 842 implementation faced by organizations are setting the overall strategy of the adoption process and the approach to be taken, and getting support from top management. Operations of the two different standards within the same or different systems until the old leases expire, drafting a repurchase option and a leaseback into new lessee guidance, and how to apply theoretical concepts with real-world lease agreements that are not an uncommon factor for both large public or private companies.

An early survey conducted by Deloitte on ASC 842 adoption provided grim findings on early efforts for some organizations in their lease accounting project. It was an eye-opener for many organizations to learn about the complexity of the project, and they are apprehensive about FASB’s deadline and the huge effort needed for compliance.

4. Best Practices for ASC 842 Compliance

Companies should adhere to these best practices to ensure a successful transition and long-term value creation in a timely, efficient, and controlled manner.

5. Ongoing activity: As disclosed in the ASC 842 standard, ASC 842 implementation is not a “one and done” activity. Companies should assemble cross-functional teams to review policies, disclosure requirements, re-evaluate technology solutions, revamp processes, integrate recent disclosures, and stay current on FASB-provided amendments, modifications, and clarifications. Task forces should also consider the global impacts of ASC 842. Compliance should be reassessed on a periodic basis.

4. The technology solution: Companies should evaluate technology solutions that can deliver end-to-end lease accounting compliance and maximum value. A well-suited technology solution also scales out to handling lease portfolio management, lease accounting, lease administration, lease abstraction, and lease bill pay. Technology solutions should support real-time simultaneous disclosures for statute and tax reports and dual book accounting or future accounting standards.

3. Portfolio and data cleanup: Companies should understand the details of their leases as supporting documentation is the basis for ASC 842 compliance. Inaccuracies can lead to wrong interpretations and limit valuable financial analysis.

2. Project management: Companies should take a strategic and holistic view of ASC 842 implementation. Projects should include substantial process improvements for internal controls and business practices. Companies must ensure the availability of the necessary skill sets and prioritization of work efforts.

1. Awareness and understanding: ASC 842 will have widespread and significant impact on all sectors of the economy. Companies should understand the changes, secure executive sponsorship, and facilitate interdepartmental collaboration to address the organization-wide impacts.

In conclusion, companies should be proactive in preparing for ASC 842 compliance, and key stakeholders need to focus on five areas.

5. Conclusion: Embrace ASC 842 for Financial Transparency

In time, decision makers will see that the benefits of bringing these leases onto the balance sheet under ASC 842 far outweigh any challenges that will emerge. For some, visible debt to the operating lease adjustment will present gremlins of the past. But, once they are recognized, key financial ratios such as operating income or debt to equity can be compared accurately across entities. So, much of the perceived impact simply reveals this existing information to the market, illuminating transparency in business transactions and making valuations less fraught with hocus-pocus adjustments. Consequently, savvy investors and lenders will be able to more effectively distinguish creditworthy investment opportunities. To avoid being labeled as duds, private companies now have no excuses: to get that party started and do it right!

ASC 842 presents a challenge to reporting organizations and will require commitment of the necessary resources to reach compliance. The way organizations think about lease accounting is being overhauled; processes are being redesigned, IT systems are needing to be reviewed and people are being retrained as necessary. The solution isn’t obvious and there’s no one-size-fits-all solution anywhere in sight. It’s the biggest financial process change in 30 years, and is not to be underestimated.

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