The new lease standard presents sweeping changes in the way we think about and record leases in our financial statements. Previous blog posts have discussed elements of the new standards specifically. Understanding the impact of the new standards is essential, but determining a game plan will make the implementation process go much more smoothly.
We use the term contracts purposefully as some leases are titled contract, but must follow FASB ASC 842, Leases and not FASB ASC 606, Revenue from Contracts with Customers. Knowing the standard’s definition of a lease is your first step. Then begin creating an inventory of existing leases and centralize the archiving of lease documents in an orderly fashion.
Evaluate the impact.
Quantify the impact of your organization’s adoption of the new lease standard. Manage stakeholder expectations by educating management, other owners and your board on the impact to financial statements and ratios or key performance indicators (KPI). Clarify agreement terms with lenders and discuss the expected impact on debt covenants.
Create efficient and effective lease reporting. Evaluate the impact of the new lease standard on future business decisions. Is a transition team necessary for your company? What is your process for capturing all relevant lease information? Who is authorized to enter into contracts? Going forward, should you enter into shorter lease terms? Consider updating your capitalization policy.
Is it worth investing in lease software to aid in FASB ASC 842 compliance or will Excel suffice?
The Corrigan Krause advantage.
Corrigan Krause can assist your company or not-for-profit organization with implementing the new lease standard – customized education for your entity; outsourced accounting solutions for your leases including lease tracking, review of agreements, transitional journal entries upon implementation, periodic accounting solutions [journal entries and accounting]; consideration of GAAP alternatives.
Now is the time to start!
Significant variable lease payments will require specific analysis as will accounting for renewal options. Knowing and understanding the elements of significant leases is imperative.
Segregating lease and non-lease components.
FASB ASC 842 allows lessees to segregate out non-lease components so that they are not included in the valuation of the right-to-use asset and lease liability. Examples include maintenance, cleaning, and repair services specified in a lease. This allows the lessee to NOT include 60 months of cleaning and maintenance costs in its lease liability, for example. It’s important to note, however, that when a lease stipulates the lessee pays the property taxes and insurance, these costs MUST be included in the right-of-use asset cost and related lease liability as they are considered lease components.
Impact of comparative financials.
Although ASU 2016-02 is effective for private companies for the calendar year December 31, 2021, it must be retrospectively applied. As such, if comparative financials are presented in the year of adoption, the changes must be made retrospectively to the beginning of the earliest year presented.
Private company accounting elections.
The FASB has allowed certain accounting elections and practical expedients to private companies:
- Option not to reassess the classification of existing leases.
- Option to use the “risk-free” interest rate [such as the rate on 5-year Treasury Notes] in lieu of calculating the company’s incremental borrowing rate.
The new lease standard is effective for private companies for annual reporting periods beginning after December 15, 2020 (2021 calendar year).
Please contact a member of your Corrigan Krause advisor team, or email email@example.com for further discussion.