A Quick Guide to ASC 842 and Lease Accounting
Many companies have begun to divest their real estate investments after the work-from-home (WFH) concept caught on due to the Covid-19 pandemic. Others have started re-evaluating their leased assets and how they can use them. This has led to companies wondering if they need to comply with regulations, they may be unaware of.
As a fact, even before companies began re-evaluating their leased and owned assets in the real estate market, the Financial Accounting Standards Board (FASB) released the ASC 842 lease accounting standard in 2019. Initially, it applied only to public companies. However, the FASB extended the ASC 842 to private companies as well in 2020.
The ASC 842 standard is basically the successor to the US GAAP lease standard. To put things simply, ASC 842 is a lease accounting standard that requires all businesses to maintain a record of their leased assets. In addition, the standard also requires every company to disclose its leased holdings at regular intervals. While some companies have already made arrangements to comply with the ASC 842 standard, others have not.
Here is a brief look at what ASC 842 is and how companies can easily comply with it.
ASC 842 makes lease accounting transparent
After the Enron fallout, authorities and regulators discovered many loopholes in the previous lease accounting standards. These included the FAS 13 and ASC 840, which were applicable for a very long time. However, after discovering the shortcomings of ASC 840 and FAS 13, FASB worked on ASC 842 for over a decade.
While the FASB initially required only public companies to disclose their leased and rented assets, in 2020, they extended it to all American companies, including private businesses, not-for-profit, and non-governmental organizations. It’s important to note that the IFRS 16 standard applies to companies that operate abroad.
As ASC 842 applies to all public and private companies, lease accounting is now a transparent and verifiable process.
Here's how companies can ensure compliance with the ASC 842 standard:
Compared to FAS 13 and ASC 840, ASC 842 is more complex. As a result, there is a lot of paperwork and rules and regulations to follow. Companies may find this cumbersome. To be compliant, companies may do the following:
- Whether your real estate investments are clubbed under operating or financing leases, you still need to identify them as a liability or asset. Exemptions exist as per rules and regulations.
- Declare all your contracts on the company's balance sheet
- Provide clarifications to your stakeholders so they do not worry about your company's revenue generation capacity.
Here is how to implement systematic lease accounting
- Make a list of all your moveable and immovable assets. Identify them as assets or liabilities, and if they are related to real estate, mark them so.
- Foresee any changes in your revenue generation and bottom-line figures, and make contingency plans
- Clarify possible changes in the balance sheet to your investors timely to ensure that they don’t turn sceptical
- Use a reliable software tool to automate, track, and manage your lease accounting processes
- If there are changes made to existing lease contracts, make sure that you continue to record them
ASC 842 can be complex, but help available
Compliance requirements of the ASC 842 standard can seem complex due to the extensive paperwork involved. The rules and regulations, the exemptions, and other criteria can seem overwhelming.
To simplify and streamline the compliance workflow, you can leverage the extensive features of a software solution like Lease Insight. Its reliable software tool automates the process of monitoring and tracking your assets and generates valuable reports. These reports not only help you comply with ASC 842 but also raise investor confidence.