After numerous delays, ASC 842 became effective for private companies and not-for-profits for years beginning after December 15, 2021. Entities that prepare financial statements in accordance with GAAP will be required to fully implement the requirements, which include the recognition of right-of-use assets and lease liabilities on their balance sheets, for their 2022 financial statements.
Whether you have one lease or many, there is work to be done to implement the new standard. CSH is here to walk you through it.
Below are 4 steps your organization can perform.
How Can I Implement the New Lease Accounting Standard?
Step 1: Prepare a Complete Listing of Your Leases
Having a complete lease inventory is critical if you want to implement the standard accurately and on time and begins with performing a review of lease agreements and gathering the related contracts. It is also important to scrutinize service agreements to determine whether there are any embedded leases within the contracts.
Step 2: Determine Your Organization’s Policy Elections
This analysis should include any practical expedients your organization intends to implement. There are a variety of policy election options, including:
- Electing not to apply the new lease accounting rules to leases with a term of 12 months or less.
- Electing to combine lease and nonlease components as a single lease component.
- Electing to use the risk-free rate in lieu of determining the implicit rate for each lease or incremental borrowing rate for the entity.
- Electing to define the “major part” of the economic life of an asset to be 75% and electing to define “substantially all” of the fair value of the asset as 90% when evaluating the classification of a lease between finance and operating.
- Electing to adopt the standard only in the current period (without restating prior-year financial statements).
- Electing not to reassess the lease classification upon adoption of the new standard (i.e., an operating lease remains an operating lease and a finance lease remains a finance lease).
Step 3: Determine Calculation Method: Software or Manual?
Organizations can perform the lease accounting calculations in one of two ways: by using a software provider or doing manual calculations. While utilizing spreadsheets to perform calculations may suffice if there are relatively few leases, the calculations required become cumbersome and susceptible to error as an organization’s leasing activities grow or become more complex. Organizations with a large volume or complex lease agreements will benefit from the improved controls over the calculation process and the automatic aggregation of lease information required for disclosure purposes provided by specialized lease accounting software.
Step 4: Determine Which Lending Arrangements Need to Be Altered
Adopting the new lease accounting standard could affect your current lending arrangements. You should determine which of your arrangements need to be altered (including debt covenants) as a result of adopting the new standard, so you can work through them one by one.
How CSH Can Help
We can help you implement the new lease accounting standard quickly. Our streamlined process (using LeaseCrunch’s straightforward interface and in-app help links, wizards, and definitions) is backed by years of experience guiding organizations like yours through complex changes.
Contact your CSH Advisor to help develop your implementation plan.
Is your business compliant with the new lease accounting standard?
See our podcast, “Countdown to ACS 842 Readiness”