Leases have always been an area of accounting that, one way or another, have impacted all aspects of financial reporting. And while the process of handling leases was a commonly understood practice, with FASB’s introduction of the new lease accounting standards, ASC 842, dealing with leases is set to change. For private companies, the deadline for adopting the ASC 842 standards is coming up quickly. While it was initially set to go into effect at the beginning of 2020, the COVID-19 pandemic changed the schedule to provide private companies and nonprofit organizations with relief during this time. However, ASC 842 is now scheduled to take effect December 15th. So, what can you do to prepare for the ASC 842 deadline and ensure that you will be compliant with the standards? Read below to find out what is changing with ASC 842 and what you can do before the deadline.
What is Changing?
In the past, companies would account for leases exclusively through an income statement. However, with the new standards, companies will report leases through the balance sheet. Implementation of the ASC 842 standards, which replaces GAAP 840, increases visibility into leasing obligations as organizations are required to recognize all leases as assets and liabilities. The previous difference between capital and operating leases is eliminated and, while capital leases were already recorded on the balance sheet, operating leases, disclosed in financial statements, will now have to be recorded there as well. With these standards in place, stakeholders will be able to judge a company’s indebtedness efficiently and accurately, as all leases must be classified as either a finance or operation lease and recorded in the balance sheet. So, how do you prepare for this?
Know and Understand the Standards
The best way to ensure compliance with ASC 842 is to make sure you understand the new standards. In order to ensure all companies know what to expect after December 15th, FASB has provided a detailed overview of what must be changed and what the standard entails. It’s extremely important to familiarize yourself, and those involved in the transition process, with the standards and their implications now, to avoid any confusion when the deadline comes.
Prepare for Using an Accounting Software
While Excel documents were sufficient in delivering financial statements for certain leases, using the balance sheet requires having a more centralized and detailed statement of financial position. As opposed to a regular financial statement, the balance sheet is used to evaluate a business as it reveals the company’s assets, liabilities and shareholder equity. With this information, a company can be evaluated based on a clear snapshot of the finances at the time of the balance sheet’s publication. Given the type of information required for the balance sheet under ASC 842, lease accounting software is a resource to consider. Lease accounting software, like the one provided by Yardi Corom, provides a comprehensive cloud-based solution that is tailored for CRE occupiers and built to ensure compliance.
Using such software provides easy setup, flexibility for configuring lease parameters, accurate and automated FASB accounting calculations and the ability to view all financial information alongside your lease administration workflows. All this allows your accountants to calculate and report with accuracy and confidence. Additionally, you can set automated notifications for your finance team to remind them about payment activities or automatically generate abstracts to reduce errors. Lease accounting software can help you centralize and facilitate the entire process of compliance by the December 15th deadline.
Review Existing and Upcoming Leases
Before the ASC 842 deadline, take a closer look at both your existing and upcoming leases to get a clear idea of where you stand as far as compliance goes. Make sure to also pay attention to contracts that contain or include leases. It’s important to understand them and how they will be impacted by the new standards. You want to know exactly what to expect when the deadline comes, so you are prepared to act accordingly with both existing leases and future ones.
Getting Everyone Involved
While the accounting department is the one most responsible for facilitating the transition to ASC 842, make sure to also include other parties that may link to a lease agreement in the transition as well. For instance, consider your IT, legal and even procurement departments. Ensuring that everyone involved is on board when the deadline comes will facilitate an easier and efficient transition.
The ASC 842 deadline may seem either right around the corner or some time away, depending on how you look at the remaining two months. However, it’s never too early to start preparing for the transition to ensure that your company is ready to make the change efficiently, on time and with as few challenges as possible. Make sure you invest the necessary time and resources to prepare for the ASC 842 deadline.
How can Yardi Corom Help with This Transition?
Yardi Corom is a simple and comprehensive accounting, lease and workplace management solution for CRE tenants. Our cloud-based software solution increases efficiency and accuracy across your entire lease portfolio: manage leases and subleases, track key lease data, centralize transactions and become FASB/GASB/IFRS compliant. To learn more, you can visit our website or schedule a meeting with our team.
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