After many years of deferral, the FASB is finally requiring the adoption of Accounting Lease Standard No. 2016-12, Topic 842, Leases. The new standard is required to be implemented for fiscal years beginning after December 15, 2021 (if your year end is December 31, 2022 – this means you!).
Under ASC 842, all property, plant, and equipment leases that have a committed lease term greater than one year must be recorded on the balance sheet as an Asset (“Right of Use Asset”) and Liability (“Lease Liability”). The old days of the off-balance sheet operating lease are now in the rearview mirror.
Depending on your level of leasing activity, this could require a significant amount of work from your accounting department -- not only in the year of implementation, but on an on-going basis too.
Some companies will only have minimal leasing activity. A real estate lease for example, which generally would seem to be straight forward, could be complicated if it is with a related party, or has extension options, has been modified, etc.
Here is a link to our previous blog post which gets into some of the details of the standard:
Highlights of the New Lease Accounting Standard
Our firm will be leveraging an automation solution called LeaseCrunch to help our customers track their leases. Here are some of the things that LeaseCrunch automates:
- Detailed lease tracking
- Amortization schedules and monthly standard journal entries
- Calculation of required ratios for footnote disclosures (weighted average remaining lease term and discount rates)
- Real time adjustments related to lease modifications
Additionally, as your advisors, Meaden & Moore can consult with you on the following:
- Assistance with proper classification of leases between operating and finance
- Assistance in preparing required GAAP financial statement disclosures
- Assistance with formally documenting lease policies
- Training for your staff on the new standard (how to read and evaluate your leases, how to record entries to your financial statements, etc.)
We recommend early implementation of this standard to determine the impact on your financial reporting, debt covenants and internal operational metrics. Please feel free to contact Meaden & Moore if you would like to discuss the implementation of the new lease standard.