The key feature of the new ASC 842 lease accounting standards is the recognition of all leases as assets and liabilities. It means that irrespective of whether leases are classified as operating or financial leases, they must be included on the balance sheet. Of course, there are certain exemptions. Nevertheless, it has greater ramifications for a lessee with regards to financial reporting as well as the overall business.
There are many aspects of the new ASC 842 lease accounting standards which needs to be thoroughly analyzed. And further research needs to be done to ease the implementation process. First of all, lessees should know that an identified asset should be understood as right-of-use-asset ROU, and it needs to be represented on the balance sheet. Moreover, the lease payment done for the agreement of the right-of-use asset should be reported as lease liability on the balance sheet.
Various non-lease payments such as for cleaning and maintenance services and the interest element of rental payment should be reported separately. Also, intangible assets are not considered under the scope of ASC 842. Besides deciding on lease and non-lease components, businesses need to recognize the need for additional resources and the latest technology like lease accounting software.
So, what are the key takeaways for lessees? Here are three things to know about ASC 842 standards that will help lessees.
Lessees under the new lease accounting standards will have to report a new liability for operating leases. It has to be separated from debt with capital leases or loans for the assets purchased. This significant change in reporting is estimated to show trillions of dollars of ROU assets and lease payment liabilities on U.S reporting entities’ statement of financial position. Moreover, it will change the financial metrics of lessees like modification in EBITDA, return on assets, current ratio etc.
Lessees will need to analyze embedded leases present in service contracts that were previously not considered or accounted for as leases. The accounting team would need to account for lease and non-lease components separately. If that option is not possible, practical expedient should be elected as an accounting policy to account them in different ways. The main purpose should be to ease the process of accounting components separately. At the same time, it is essential to note that choosing practical expedient can impact existing debt covenants and metrics.
Practical expedients can be accessed by lessees. It can reduce the burden of ASC 842 accounting and workload of financial reporting. It can further help in complying with the new standards. You can use practical expedients for short term leases. Moreover, you can avail private company discount rate expedient, other practical expedients under ASC 842 for a successful transition, expedients for lease and non-lease combined, expedients for restating last year financials and much more.
These are the three things your business must know about the new ASC 842 lease accounting standards.
You can ease the ASC 842 implementation using lease accounting software and lease management software from Yardi Corom. For more details, visit www.yardicorom.com. Request a consultation or demo today!