At "LEASE" there is still time to implement FASB ASC 842 - PART 1

Mallory Vincent, CPA, MBA •

FASB ASC Topic 842, Leases, is on the horizon for most non-publicly held companies. The new lessee model under this standard was developed to increase transparency and comparability in financial reporting by requiring balance sheet recognition and note disclosure of certain information about leasing activities. After the FASB delayed the effective date, ASC 842 is now effective for private companies and not-for-profits for fiscal years beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022.

​Does this accounting standard affect my company or organization?

Most likely yes. That is, if your entity has a contract or contains a lease under the definition identified under the new leasing standards. A lease under the new standard is defined as “a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration.” Under ASC 842, you will still need to determine whether you have the “right to obtain substantially all of the economic benefits” of the asset, as done with existing lease standards, and also consider if you have the “right to direct the use” of the asset.

What should I be doing now to prepare for this new accounting standard?

1. Start to gather all of your lease contracts and documents and get them signed, if required. Extracting all of the appropriate figures from lease agreements can be challenging, especially when the lease contracts are not standardized. Therefore, even if you find all of your lease agreements now, there may be more information that will need to be tracked down later. Your implementation team (read more in #2 below) will need to perform a completeness review to ensure all leases have been identified. 
2. Put together a team with the appropriate skillset to take on the task of implementing and maintaining the new lease standard. Be prepared to train your employees in applying the new lease standards with new leases, amendments, terminations, etc. In addition, take into account the potential need for engaging a consultant to efficiently implement and maintain compliance if the impact of this accounting standard will be significant for your entity.
3. Review internal controls surrounding leases and set up a process to accumulate lease information. Consider the need to implement new, or change existing, business processes and internal controls to ensure compliance with the new guidance. This includes examining internal controls related to your processes for capturing, calculating, and accounting for leases. Staff should be trained on how to recognize new embedded leases that may be hidden in other types of contracts.​

​Lease accounting implementation is not going to be an overnight project. Starting early and having a team in place with the appropriate level of expertise can help you save time and money.
 
Part II of this article will focus on the short-term lease exception (for leases with terms of 12 months or less), how to record a lease under the new accounting standard, what to look for in your lease contracts, how to determine the impact of the lease accounting standards on any current debt covenants, and the judgement and estimation that may be required under the new guidance.
 
As always, our CPAs at Mason + Rich are ready to answer any additional questions. Feel free to call us at 603-224-2000.