Leases (ASC 842) applies to private companies and private not-for-profit entities in fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The biggest change that ASC 842 will have on the financial statements will be the recording of a right of use asset, as well as an offsetting lease liability. In essence, the balance sheet will be grossed up for leases. However, implementation of ASC 842 is oftentimes more difficult than it appears on the surface. A significant amount of analysis and decisions need to be made to ensure the opening entry is appropriate. Analysis needs to be performed based upon information within lease agreements such as:
- Timing of the lease payments (i.e., beginning of month versus end of month).
- Determination of a finance versus operating lease.
- Treatment of escalating rent payments and common area maintenance charges, more commonly known as CAM.
- Remaining lease term, including consideration for renewals.
- & more.
Additionally, we have found that entities may face challenges in:
- Ensuring that an entity has performed a thorough inventory of their leases – This often includes needing to go outside of the Finance function and the examination of other agreements and departments.
- Identifying embedded leases – Your entity may have lease agreements that offer free product, or the utilization of product results in the use of a piece of equipment. Under ASC 842 there are accounting implications that need to be considered as part of the implementation of this standard.
- Navigating through the many policy election and practical expedient decisions.
- Determining a discount rate for use in their right of use asset and lease liability calculation.
- Preparing the journal entries, presentation, and disclosure within the financial statements.
We can help.
The Bonadio Group has a team of professionals that can assist in:
- Working with you and your team throughout your organization to identify potential leases, as well as embedded leases.
- Determining the appropriate policy elections, practical expedients, and discount rate as part of the implementation of ASC 842 – In some cases, the use of practical expedients will save a significant amount of time and reduce the complexity surrounding ASC 842. We are well-versed on when these practical expedients should be applied.
- Calculating the right of use asset and lease liability.
- Preparing the journal entries and ensuring adequate disclosures – We have internal resources we will utilize to work with you to successfully implement ASC 842.
Getting started early is critical to a successful implementation of the new leasing standard. Contact the Bonadio Group or a member of your Bonadio Client Service Team to learn more about how we can assist you in preparing and successfully implementing this new leasing standard.
This material has been prepared for general, informational aurposes 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.