Cutting Through the Noise: What Really Matters for the New Lease Accounting Standards
Last Updated on February 9, 2023 by Morgan Beard
ASC 842, the new lease accounting standard changing how companies report operating leases on balance sheets, has proven to be more complex than anticipated. However, this should not deter your organization from taking the first steps towards compliance. The rule started going into effect for public companies in December 2018. Receiving feedback on compliance challenges, FASB has extended the implementation deadline for private companies from December 2019 to January 2021.
Adhering to new rules can be challenging and overwhelming, but if your team has a strong understanding of ASC 842, the process can move more smoothly. The reality, though, is that most real estate teams, and even finance professionals, are still sifting through the layers of complexity. Here are what the new standards really mean, and how you can prepare:
What does ASC 842 change?
Under the previous lease accounting standard, ASC 840, only capital leases were recorded on the balance sheet; operating leases were reported only in the footnotes of financial statements. Under ASC 842, every lease except for short-term leases less than or equal to 12 months in length, must be represented on the balance sheet as a lease liability and right-of-use asset.
ASC 842 requires companies to separate leases that are embedded within broader contracts. Embedded leases are commonly found in supply, service, or advertising contracts and are for specific equipment like manufacturing capacity, on-site servers, or billboards. This process is likely the most difficult part of the rule change, as it involves a thorough understanding of contract terms and sound judgment.
When will this change be implemented?
FASB extended the deadline for private companies from December 2019 to January 2021. While 2021 is still a year away, we recommend you get started now. Compiling contracts, identifying embedded leases, and extracting lease data can be time consuming.
How to prepare?
Start by tracking down all lease documents and contracts, and give yourself enough lead time to complete this task, as it makes up the bulk of the work. Numbers that your team will need to keep track of are: lease term, rent schedules, incentives such as free rent and tenant improvements, and termination fees. You will also need to track rights, options and other lease terms along with their associated dates and costs. Make the process easier by investing in a single system that is able to record and consolidate all information from your portfolio in one place. This approach would keep you organized, enable easy access to all your contracts, and ensure that nothing slips through the cracks. Allowing your real estate, finance, and other teams to access the same information in real time will help ensure a smooth transition and ongoing process.
Occupier’s platform can help you prepare for the new lease accounting standards. We provide a single system of record for all commercial lease data, giving you quick access to all critical information for ASC 842. Your team will be able to minimize time spent adhering to accounting standards and more time on finding the right deals for your business.
Check out our Lease Accounting Resource Hub for additional guidance.
