ASC 842 – Leases overhauled the existing accounting for and reporting of leases in financial statements for entities reporting on the basis of generally accepted accounting principles (GAAP). The changes go into effect for private entities for fiscal years beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022. For entities that operate on a calendar year, this will mean that the changes required by the new lease standard will need to be implemented for 2022 financial statements.
Now, you may be saying to yourself, “I don’t have to worry about this until after year end, right? January of 2023 seems like a much better time to think about this.” While this thought may be tempting, pushing off the implementation into an already busy time period will create logistical challenges that may lend itself to additional risk of error.
The new lease standard requires that an entity capitalize on their balance sheet all of their lease obligations with lease terms greater than 12 months. As part of moving to this new standard, a “transition entry” will need to be made in an entity’s books to record the appropriate asset and liability for each lease that the entity has. This can be an extremely time consuming and complex process to navigate through, as the scope and complexity of the new standard can be much greater than under the old lease rules.
Therefore, as a gift to your future self, here are five things that you should do now to get ready for the new lease standard:
- Take a thorough inventory of all leases that your entity has. This will require you to think beyond the traditional building lease. Think about any contract that the entity has that allows the entity to control a physical asset for a specified period of time in exchange for compensation.
- Once you have taken a thorough inventory of your entity’s leases, locate and save copies of the lease agreement along with any addendums and updates for each lease.
- Take note of the various aspects of each lease, including items such as the timing of lease payments, renewal options, remaining lease term, the presence of any escalating lease payments or common area maintenance charges. Consider tracking these key terms in an excel file as these items could impact the ultimate calculation of the asset and liability recorded.
- Examine your entity’s debt agreements and other agreements for any financial covenants that could be impacted by this change.
- Reach out to your CPA to discuss the new standard and the impact that it could have on your business, as well as to assist with any of the items noted above. Develop and execute a plan to implement the new standard.
The key to a successful implementation of the new lease standard is to act early, and to utilize experts who deeply understand the new rules to assist you. At the Bonadio Group, we have a team of experts who are ready to assist your business in implementing this new standard, whether it be a) technical assistance, b) software solutions, or c) full implementation solutions. Please reach out to us to see how we can help.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.