February 27, 2023
By: Kali Patterson
ASC 842 will significantly affect how organizations record and report leases. The new guidance created by The Financial Accounting Standards Board, or FASB, gives a more correct representation of a company’s lease obligations, and can have an impact on your financial statements, even if your number of leases is minimal. Organizations should take steps now to understand and implement required changes to make sure they remain in compliance.
What is Changing and Why?
The ASC 842 standard updates guidance for classifying leases lasting longer than 12 months for generally accepted accounting procedures (GAAP). These changes aim to increase transparency between investors and companies. The updated guidance will give stakeholders a better understanding of an organization’s financial position by more fully including a company’s leases on the balance sheet.
What Qualifies as a Lease?
ASC 842-10-15-3 states: “A contract is or contains a lease if the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.” This updated definition means that organizations may find themselves with more leases than they had before. Some leases, like those for real estate, will be obvious, but you will also need to look carefully for “hidden” or “embedded” leases. These may be found in unexpected departments or buried in service contracts and had previously not been included in the balance sheet.
Common Pitfalls to Avoid
As you can see, the impact of ASC 842 will be significant. Be as prepared as possible by watching out for these common pitfalls:
- Pay attention to your debt covenants and bank capital requirements to make sure you stay in compliance.
- Don’t underestimate the value of lease management software.
- Seek advice from a qualified CPA expert. They will have the best insight into this new legislation.
- Don’t wait! This process may be lengthy, so give yourself as much time as possible to implement the transition.
Let Us Help
Change is never easy, and the impacts of ASC 842 will be significant. Still, with the right tools and advice, you will be able to survive this transition and ultimately be left with a more accurate financial picture for yourself and your financial stakeholders. Please reach out to your KEB advisors with any questions about the changeover. We are always happy to help!