What is ASC 842? A Guide to Lease Accounting
Since the Covid-19 pandemic, many companies have begun reassessing their real estate investments and the extent to which they use leased assets. As a result, companies have begun reevaluating their real estate footprints and their associated ramifications. Meanwhile, the FASB has also made it mandatory for companies to comply with the new ASC 842 standard.
ASC 842 is a vital lease accounting standard that public companies had to adopt and comply with until 2019. It was published by the Financial Accounting Standards Board (FASB), which eventually extended the jurisdiction of the standards to private companies in 2020.
In brief, ASC 842 lease accounting standard mandates all companies to track and disclose their leased assets. It replaces the older ASC 840 that used to be the US GAAP lease standard. Currently, companies can roughly be divided into two groups — those that have adopted ASC 842 and those that have not. In this article, we take a quick look at what ASC 842 is and how it pertains to lease accounting.
What is ASC 842, and why is it important?
ASC 842 mandates public and private companies to disclose and track their leased and rented assets. This standard was published concerning problems that arose after the Enron fallout.
Initially, lease accounting was guided by FAS 13 and ASC 840, both of which had shortcomings. It took the FASB almost a decade to prepare and publish the ASC 842 to improve transparency and corporate accountability concerning immovable assets. ASC 842 applies to American organizations, while IFRS 16 pertains to international entities.
Non-governmental and not-for-profit organizations now have to disclose information about lessees and lessors. This allows the accounting regulatory bodies to take cash flow uncertainties into account.
ASC 842 requires all companies to do the following:
ASC 842 is more complex than its predecessors and requires companies to make more effort in terms of paperwork to comply with the rules and regulations. As a company, you need to:
• Identify every lease as an asset or a liability. It does not matter if they are grouped under operating or financing leases. However, there are a few exemptions.
• Declare contracts that were off- on the company’s balance sheet.
• Taking these assets and liabilities may impact your stakeholders’ opinions about the company’s profitability; hence you need to provide clarifications wherever necessary.
What to do for systematic lease accounting?
As a company, you need to:
• List all the moveable and immovable assets and duly group them under liabilities and assets. Some of these liabilities and assets may concern real estate, while others may be related to machines, products, etc.
• Anticipate the differences in income and profitability, and the final balance sheet
• Communicate changes to investors on time to avoid any negative opinions about the changes in the balance sheet
• Automate tracking and monitoring of lease accounting to avoid errors using reliable software solutions
• Record any changes that take place during a lease contract’s serving period.
ASC 842 may seem complex, but it’s not with the right support
As a business, you may find the ASC 842 unduly complex. However, it can be easier than it seems, and complying with it is not all that difficult.
Taking the help of software solutions like Lease Insight, monitoring and tracking assets can become relatively straightforward. You can also benefit from a realistic outlook on your balance sheet and prove it to be a strength rather than a weakness when convincing the various stakeholders.