What is ASC 842?
The Financial Accounting Standards Board (“FASB”) issued ASU 2016-02 in February of 2016 to create ASC 842, Leases, which supersedes the lease accounting requirements in ASC 840.
ASC 842 is effective in 2019 for public companies, not-for-profit entities that have conduit debt obligors, or employee benefit plans that file with the Securities and Exchange Commission (“SEC”). All other entities must comply in 2020.
The new standard will affect every entity that enters into a lease. For most companies, the primary impact will be related to operating leases that must be recognized on balance sheet for lessees under the new standard. Additional areas with significant differences from the prior standard include accounting for sale-leaseback transactions, build to suit leases, and lease classification.
Why Act Now?
ASC 842 will have a significant impact on how businesses manage, account for and report substantially all leases, including equipment and real estate.
Compliance with ASC 842 will require extensive data gathering and abstraction of existing lease agreements with the majority of companies currently relying on manual processes and spreadsheets. The detail and volume of information required to complete the ASC 842 assessment and related disclosures is significantly greater than the lease information historically accumulated and maintained by most companies.
Companies will need to ensure they have identified and captured all leases, including leases embedded in agreements to buy or sell goods or services. Companies will need to know not only what all their leases are, but also the point in the lease life at any given time.
Low-quality lease documentation and decentralized lease processes are factors that will slow the process of capturing complete data required for the ASC 842 assessment. Depending on the complexity and size of a company’s lease portfolio, it could take a company up to six months to implement the new standard.
Companies will also need to understand what impact, if any, recognizing an asset and liability for operating leases will have on compliance with existing debt covenants. Publicly traded companies using US GAAP or IFRS are estimated to have over $3.3 trillion of lease commitments, 85% of which do not appear on their balance sheets under the current lease accounting standards. If borrowing agreements do not exclude operating leases from covenant calculations that use balance sheet measures as inputs, companies will need to start discussions now to ensure that they are not in default when they initially report under ASC 842.
How Centri Can Help?
Centri is comprised of seasoned professionals with extensive GAAP and SEC reporting experience including former international and Big 4 accounting firm partners, senior managers, and managers.
Centri can offer technical accounting guidance and lead implementation projects by leveraging our accounting and reporting expertise and project management capabilities. Areas where Centri can assist companies with their ASC 842 assessment and implementation include:
- Identifying a company’s full population of leases including any embedded leases that may exist within service contracts,
- Based upon the population identified, determining if the required change under ASC 842 is likely to have a material impact on a company’s current accounting,
- Developing a gap analysis to help companies understand where processes, systems, controls, and reporting need to be updated upon the adoption of ASC 842,
- Assisting in the company’s plan to address identified gaps as identified in the analysis,
- Assisting in the ASC 842 implementation including
- Establishing a centralized repository for all lease agreements,
- Reviewing all lease agreements and inputting relevant information into the company’s lease accounting system, and
- Reviewing and testing the output of the lease accounting system for a sample of leases,
- Determining information required to comply with ASC 842 and drafting required disclosures, and
- Providing training on ASC 842 to company personnel.
Centri Business Consulting is dedicated to providing the highest quality finance and accounting consulting services to its clients by being reliable and responsive to their needs. Centri provides companies with the expertise they need to meet their reporting demands. Centri specializes in financial reporting, internal controls, technical accounting research and CFO Advisory Services for companies of various sizes and industries. From complex technical accounting transactions to monthly financial reporting, our professionals can offer any organization the specialized expertise and multilayered skill sets to ensure the work gets done right.