Significant changes are now becoming effective for the GAAP accounting treatment of lease arrangements. This page aims to provide some basic guidance to assist you in implementing Accounting Standards Codification (ASC 842), Leases.
What does this new guidance mean for your organization?
For entities reporting financial statements on a GAAP basis, the new standard requires the remeasurement of all significant lease agreements, and fundamentally strives for recognition of substantially all lessee leases on the balance sheet as right-of-use (ROU) assets and lease liabilities. The new guidance will likely impact various financial ratios and metrics, including certain debt covenants calculations. Additionally, it adds new financial statement disclosure requirements.
ASC 842 is required to be adopted for fiscal periods beginning after December 15, 2021. Therefore, this guidance is effective for the calendar year ending December 31, 2022 and various other fiscal year ends thereafter.
The guidance offers numerous “practical expedients” to privately held companies to lessen the burden of compliance, including an exemption for leases with terms of 1 year or less (including any renewals periods probable of being exercised).
Remeasurement and recognition under ASC 842
Lessee leases: The most significant change is that operating leases are generally required to be recognized on the balance sheet, whereas operating lease obligations were formerly just disclosed. The term “capital lease” is no longer used and “finance leases” are introduced as a new lease category, generally with similar characteristics as capital leases. Expense recognition will typically be similar as under the former guidance.
Lessor leases: The impact to lessor lease accounting is relatively minor in most cases.
What should you do now?
For those with few relatively straightforward leases, this may be a fairly simple process. However, if you have many leases and/or leases with more complex elements, this process is more involved and may require our assistance. In either case, we strongly encourage you to complete the steps outlined below prior to your organization’s year end, to avoid delays in meeting reporting deadlines. We invite you to reach out to your GFC team to discuss next steps and practical considerations.
We have compiled several valuable tools to assist you in this process and recommend that you take the following steps:
- Read a summary of the new guidance and/or watch a related webcast to orient yourself to the new guidance. We suggest the educational resources linked below.
- Identify and prepare a schedule of your organization’s leases, including those that ended in the current reporting period.
- Consult with your GFC team to discuss the implementation process and determine any related assistance we can provide to you and your team.
- Determine which practical expedients will be applied (as outlined in the educational materials below).
- Perform lease computations.
- Additional research may be required based on individual lease scenarios. See detailed educational resources linked below.
- To perform and maintain your own calculations, consider LeaseQuery software. Click here for pricing and other information.
- Use provided Excel calculation templates: Finance lease calculation template and Operating lease calculation template
- Determine the transition method (retrospective to comparative period(s) or effective at the beginning of the current period) for financial reporting.
- Consider the impact on debt covenants and other key ratios; communicate the effect to stakeholders.
- Create new G/L accounts and record appropriate journal entries for the period.
- Document lease adoption considerations in a memo (link to file on the GFC webpage, #1 below).
- Perform year end close and reconcile lease balances; prepare financial statement disclosures.
The above information is intended to be a high-level summary and should be reviewed in conjunction with the related accounting guidance in ASC 842 and other resources.
- GFC Overview of ASC 842
- RSM guidance