Lease Accounting Changes Are Still Coming
Accounting Standards Codification (ASC) 842 has been a reminder of the well-known children’s story about a boy who sat on a hillside watching the village sheep. In his boredom, he found amusement in creating fear and chaos among the sheep and villagers by yelling, “Wolf! Wolf! The wolf is chasing the sheep!” Like in the story, this standard has been in discussion for the last several years, and many expected it to be issued several different times in the last decade—but the final standard did not materialize until 2016.
In 2016, FASB published ASC 842, which was supposed to be effective for private companies beginning January 1, 2020. However, in October 2019, FASB approved delaying the standard’s effective date for private companies to annual reporting periods beginning after December 15, 2020. This was a significant relief for many companies, as most had been preoccupied with ASC 606 adoption and implementation and had fallen behind on their implementation processes for ASC 842.
With ASC 606 adoption complete (or almost complete), there’s no better time to prepare for ASC 842. Below is a list of action items to consider when planning for implementation:
- Identify implementation team
- Read the standard
- Make decisions about transition approach, practical expedients and accounting policies
- Make an inventory of leases (property, equipment)
- Obtain copies of all lease agreements, service contracts and other agreements that might contain right-of-use assets to help ensure the inventory of leases is complete
- Analyze leases for extension/termination options, contingent/variable payments, guaranteed residual values, etc.
- Determine incremental borrowing rates, if the risk-free rate practical expedient is not elected
- Develop accounting policies to determine proper classification of financing and operating leases
- Determine which renewal options are “reasonably certain” to be exercised to calculate lease terms
- Calculate the present value of future lease payments to determine the lease liability
- Gather information on upfront lease costs and incentives received to determine the right-of-use asset
- Draft adoption adjustments to the financial statements
- Review and challenge the work for completeness, accuracy and adherence to the standard
- Schedule an early review with your auditor of your adoption approach and adjustments
- Gather information, by type of lease, for terms in lease agreements, key assumptions and judgments and data for new enhanced disclosure requirements
- Develop templates for footnote presentation
If your company needs tools to assist with adopting the new lease standard, check out BKD LeaseVision—a three-part solution designed to help organizations implement GASB 87 and FASB ASC 842 on lease accounting with ease. BKD LeaseVision provides a tool to extract key lease terms from lease agreements, a road map to help provide an in-depth process framework and an Excel-based tool to help perform calculations and develop lease amortization schedules.
Make sure you’re not caught off guard like the villagers in the story when the wolf actually appeared—reach out to your BKD Trusted Advisor™ or use the Contact Us form below for more information on how to prepare for ASC 842.