New Lease Accounting Standard

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After a delay of many years, the new lease standard (FASB ASC Topic 842) finally became effective in 2022. The system seeks to ensure more transparency in financial statements for all organizations – from government organizations to public companies and private non-profit firms. 

The annual reporting period of this starts on or after January 1, 2019. New standards will likely impact almost every industry-public and private. 

We’ve created this guide to educate our readers and clients about the New Lease Accounting Standard, it’s types and benefits, etc.

Let’s continue reading:

What are The New Lease Accounting Standards?

FASB issues new lease accounting standards – ASC 842, or Topic 842. It governs how private and public entities record the financial impact of their lease agreements. According to ASC 842, leases are contracts granting control of identifiable assets for a fixed period in exchange for payment. 

Now, all public and private organizations need to report under US GAAP to record their leases on the balance sheet. This will increase the transparency into liabilities resulting from leasing agreements and reduce off-balance sheet activities.

Effective dates of ASC 842 for public companies

FASB’s new lease accounting standard becomes effective for reporting periods starting after December 15, 2018. The new standard went into effect for calendar-year-end businesses on January 1, 2019.

Effective dates of ASC 842 for private companies

ASC 842 is effective for the annual reporting periods of private companies and non-profit organizations starting after December 15, 2021. This implies that many private organizations are working through the lease accounting transition for the 2022 year-end.

Changes Under ASC 842

ASC 842 has made one of the biggest changes to accounting standards in recent years. As a result, company executives and accounting professionals must be aware of the proper implementation of the new lease accounting standards. Here are the changes under ASC 842:

• All lease contracts (operating and finance) with a period of more than 12 months should be recognized under the lease on the balance sheet.

• Organizations must add all leases on the balance sheet as a right-of-use asset with a lease liability.

• Since there will be lease assets and liabilities for all leases, attention will shift to whether or not arrangements are leased.

• Segregating lease and non-lease (e.g., service) components will be a new important process in a lease contract.

• For sale/leaseback accounting, more transactions will be involved due to the elimination of continuing involvement rules.

• Equipment sale/leasebacks may not qualify for sale/leaseback accounting if the equipment sale/leaseback has a disqualifying repurchase option.

• Require disclosure of qualitative and quantitative information about lease transactions, including variable lease payments and options to renew or terminate leases

Types of Leases Under ASC 842

With the replacement of GAAP standard ASC 840 with ASC 842, the FASB changed the way of execution of lease accounting. Before the amendments, leases were either capital or operating, but with the new standard, there are two types of leases – finance and operating. 

Finance Leases: Leases that are similar to the purchase of underlying assets are classified as finance. It essentially treats as an asset if the lessee purchases it but is financed by the lessor. This prevents organizations from hiding the financial obligations that are liabilities. 

Operating Leases: Operating leases are lease contracts with no purchase of the underlying asset. These are used for the limited-term leasing of assets and include traditional renting relationships. 

Benefits of New Accounting Lease Standards

New ASU will provide benefits to many investors and other financial statements user by increasing the transparency of information. Here are some of the benefits of new accounting lease standards:

• Faithful representation of a user’s rights and obligations related to leases.

• Lessees must recognize the lease assets and liabilities arising from leases in the balance sheet.

• Require disclosure of qualitative and quantitative information about lease transactions, including information about variable lease payments and options to renew and terminate leases.

• Improves the understanding of your financial commitments regardless of how you finance the business assets.

• The new accounting standard will give investors, lenders, and other financial statement users a more comprehensive view of your company’s long-term financial obligations. 

• It helps the organizations gain banks’ trust for future loans or financial needs. 

• Provides you with additional information about the leasing activities of the lessor. It also helps you understand the lessors’ exposure to credit and asset risk due to leasing.

• New investors can show interest in your organization based on your updated balance sheet with leasing details. 

Implementing the New Accounting Lease Standard with Experts.

Changed lease accounting needs organizations to be more focused on what they classify—or do not classify—as leases. Also, implementing the new lease standard requires proper knowledge and time to build a spreadsheet with all the necessary formulas. This can indeed be time-consuming and overwhelming. 

So, contact our accounting experts make it easier and accurate for you. Contact us to start doing lease accounting correctly and efficiently.