New Lease Standard: ASC 842
the impact of New lease standard ASU 842 on the accounting industry
The new lease standard (ASC 842) issued by the Financial Accounting Standards Board (FASB) in February 2016 changes the way leases are accounted for on a company's financial statements. Under the previous guidance (ASC 840), leases were classified as either operating or capital leases, with only capital leases appearing on a company's balance sheet. Starting on January 1, 2022 Not-for-Profit and private companies will be required to adopt this standard for all new leases (and those with changes to their lease agreements). The new standard is expected to have a significant impact on the financial statements of companies that have leases and will require them to make changes to their accounting systems and processes.
HOW to simplify ASC 842 for nonprofit accounting:
ASC 842, also known as the new lease standard, replaces ASC 840 as the guidance for accounting for leases. Although this standard increases the complexity of accounting, there are a few elections that can be made to simplify its adoption for Not-for-Profits: 1. Elect to exclude leases of 12 months or less 2. Elect to use the Risk-Free rate for lease calculations 3. Ensure your capitalization of the lease threshold is as high as possible.
The main changes from ASC 840 to ASC 842 include:
The definition of a lease has changed. There must now be an Identified Asset where the Lessee has the right to obtain substantially all the economic benefit and the right to direct its use.
A lease liability and a Right-of-Use asset will appear on the balance sheet for both Operating leases and Finance leases (previously Capital Leases). The calculation of these balances requires that specific costs and benefits be included
Embedded leases must also be included
There have been changes to the criteria used to classify assets as Operating or Finance leases.
Lessor accounting also changes under the new standard, with lessors now required to recognize lease income in a manner similar to how lessees recognize lease expenses.
The new standard also requires additional disclosures in the footnotes to the financial statements to provide more information about a company's lease arrangements.
Beyond the changes in accounting methods, organizations will need to develop and document new systems to identify and track leases on an ongoing basis. We recommend that organizations create an Adoption Memo documenting the process used to become ASC 842 compliant as well as Policy Memo documenting the process to be used to stay compliant.