Lease Accounting: ASC 842 Set to Become Effective for Periods Beginning after December 15, 2021
Under the prior leasing standard (ASC 840), many Companies disclosed their leases in the financial statement footnotes and many leases were not recorded on the financial statements. As a result, the FASB issued ASU 2016-02 (the “leasing standard” or “ASC 842”) in February2016 to provide updates to ASC 840, including more consistency and transparency to lease accounting. The new standard requires that all leases (both operating and finance) to be recorded on the balance sheet.
Adoption of ASC 842 is mandatory and will be effective for all private companies for fiscal years beginning after December 15, 2021. As such, private companies that report on a calendar year should adopt ASC 842 effective January 1, 2022, in preparation for their first calendar year-end reporting date as of December 31, 2022.
The ASC 842 lease accounting standard represents a significant change in accounting processes and will widely impact your business since all leases are now required to be recorded in your financial statements. Unlike most accounting standard implementations, ASC 842 will impact more than just the accounting department. Below is a list of areas that are potentially impacted:
- Real estate leasing operations
- Equipment leasing operations
- Information technology
Companies that have a considerable number of lessee or lessor leases face a substantial implementation effort, including technical accounting, policy development, lease data management and extraction, validation, technology design and implementation, processes, workflow and internal controls. The transition to ASC 842 is oftentimes underestimated and will take considerable time and planning. Additionally, there is an imperative to get the implementation completed accurately since leases are now required to be recorded in the financial statements and more audit scrutiny will be required.
Below are the key areas that Companies should be thinking about now in preparation for the transition:
- Getting all lease agreements in one single repository
- Selecting third party leasing software
- Extraction of ASC 842 compliant information into software
- Validation of the leasing information
- Deciding upon practical expedients and accounting policy elections
- Search for unrecorded leases and embedded lease review
- Discount rate development
- Accounting policy updates
- Disclosure updates