Understanding Practical Expedients in ASC 842 and IFRS 16

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It can be a daunting task for many organizations to implement the new ASC 842 and IFRS 16 lease accounting standards. The concerned managers would need to evaluate the existing process, understand the new standards in-depth and find methods to make the transition easy and successful. Many companies are evaluating their technology stack and using lease accounting software. However, the accounting boards have extended their support to organizations by providing various options to ease the implementation process. 

For more information on ASC 842 lease accounting compliance also read: Deadline Extension for ASC 842 Lease Accounting Compliance: What It Means For Private Companies?

Practical expedients can be defined as considerations, reliefs or shortcuts provided by the accounting boards to make it easier to transition to ASC 842 and IFRS 16. Companies have the option to choose these considerations in different ways, such as on a lease-by-lease basis, by a certain class of a given asset or as an accounting policy election as per the practical expedient used. 

Companies must choose practical expedients wisely after understanding their reporting requirements, lease types, etc. Also, you must study the pros and cons of different recognition and transition practical expedients without which, errors can creep in lease accounting. It will eventually affect the cost, effort and level of work involved. Find out some of the major practical expedients provided by accounting boards. 

Recognition Practical Expedients

Under recognition practical expedients you have a short-term lease exemption and a low-value asset exemption. The former allows companies to recognize a lease term of 12 months or less as a short-term lease. Thus, it can be avoided from the balance sheet and considered as an operating lease. It’s important to note that FASB and IASB have provided this consideration. However, IASB says that a lease with a purchase option cannot be a short-term lease, whereas FASB allows the same provided that the lessee is certain not to exercise the purchase option. You must refer to ASC disclosure requirements to understand costs and disclosure balances related to it. 

The low-value asset exemption enabled by IASB provides companies the opportunity to avoid recognizing lease assets on the balance sheet, given that value of the asset when new was less than $5,000. Know that a lease for anything regardless of the number of assets can qualify at a sub-$5,000 value. It is worth noting that ASC 842 does not specify a materiality threshold to remove leases. 

Transition Practical Expedients

The practical expedients mentioned before can be selected individually. Under FASB’s rules for ASC 842, some practical expedients need to be selected as a package. These are known as a package of transition practical expedients. This package consists of three expedients and it has benefits like saving time and avoiding reevaluations of each lease under the criteria set by ASC 842, reevaluation of existing or expired leases and the reassessment of initial direct costs.

Also, read: Accounting for Leases – ASC 842, IFRS 16 and GASB 87

Other Practical Expedients

Combining lease and non-lease components is one of the expedients that helps lessees and lessors to not separate and allocate the consideration between a lease and non-lease components. In other words, companies will not have to conduct an analysis to decide the method of allocation. Besides, FASB and IASB have issued practical expedients to help with lease concessions during the COVID-19 pandemic. 

Practical expedients are created to help organizations overcome the challenges concerning the implementation of new lease accounting standards and financial reporting. It can certainly help you save time and money. To further ease the implementation process, you can use lease accounting software. Yardi Corom’s lease accounting software and lease management software will help your business to comply with the new lease accounting standards of IFRS 16 and ASC 842 without hassle. For more details regarding features of the lease accounting software, visit Yardi Corom.