The new ASC 842 lease accounting standards are in place and a successful transition is essential to ensuring compliance. The official date for non-public entities to adopt the new standards was December 15, 2021, so all companies are now required to comply with the ASC 842 standards to avoid being put on the wrong side of Generally Accepting Accounting Principles (GAAP). While there are no monetary sanctions in place, non-compliance can have a great impact on creditworthiness. So, what is changing and how can companies ensure a successful transition to the new lease accounting standards?

What Lessees Need to Know About the Changes

Being compliant requires having a strong handle on all leases and reporting them on the balance sheet to ensure transparency into the lease portfolio. However, what can be considered a lease is not always clear, which is why it is important to note that even agreements where the word “lease” doesn’t appear may sometimes be included. As defined in the ASC 842 guidelines, a lease refers to “conveying the right to control the use of the specified asset over a period in exchange for consideration, and it could be a portion of a contract.” In short, everything from equipment to services and all other used, unowned services that require a monthly payment are part of a lease which must be reported on the balance sheet. Collecting all this information that was not included in reports before is necessary to report and ensure compliance with ASC 842.

A Well-Oiled Machine

The new lease accounting standards require a higher degree of collaboration between all parties involved in the leasing process. To ensure accuracy when reporting leases in the balance sheet, everyone from finance, accounting, legal and tax must be involved and work together to ensure all necessary documents and information are being reported accurately. While many companies might assume that the accounting department is responsible for ensuring compliance, it is in fact a “partnership and a human process” that calls on all involved in a lease to communicate and contribute to the reporting process. Also important to keep in mind is that the new standards only have a direct impact on the reporting system and not on how the lease transaction process works. With this in mind, it’s critical that the operations of reporting leases are well-organized and communication between all involved is strong to ensure accuracy and on-time reporting.

Easing the Transition Through Technology

For those companies managing multiple leases, making the transition to the new accounting standards will require an effective course of action that allows not only for accurate reporting and calculations, but also for mitigating the risk of formula errors and tracking changes, such as lease modifications and new leases. Given the large volume of data, being able to do all this while accounting for leased assets and lease liabilities requires the help of a tool that is easy-to-use while ensuring leases are properly accounted for and reported on. This is key for being compliant with the ASC 842 guidelines as lease accounting software, like the one provided by Yardi Corom, offers the flexibility and consistency needed to minimize compliance issues. The system provides an automated, reliable and efficient solution to accounting and finance teams.  The platform creates a complete picture across finance and operating leases for real estate and equipment which enables lessee accounting compliance, budgeting, forecasting and scenario modeling. All these are essential tools and considerations companies need to be aware of to choose the best solution for their organizations and ensure accuracy in reporting and compliance.

Transitioning to the new lease accounting standards is a challenging step companies must overcome to ensure that they are compliant. This is essential to sustaining creditworthiness and enabling an efficient process when it comes to lease accounting. While the leasing process may not change with the new accounting standards, the way leases are reported does, making it essential for companies to invest in the best solution to help them do this accurately and efficiently. For more information, check out the full whitepaper or schedule a meeting with our team.

Sanziana Bona

Sanziana Bona is a content marketing writer for Yardi Corom, a cloud-based software solution designed for commercial tenants and corporate occupiers and Yardi Kube, an all-in-one coworking management platform. She covers many commercial real estate related topics including FASB/IFRS compliance, lease accounting, coworking and flexile spaces, and more. You can connect with Sanziana via email.

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