485 Madison Avenue,
9th Floor
New York, NY 10022
Ph: (212) 792-6300
Fax: (212) 792-6350
100 Quentin Roosevelt
Blvd, Suite 516
Garden City, NY 11530
Ph: (516) 542-6300
Fax: (516) 542-9021


Lease Standard Updates Have Finally Arrived – Here’s What You Need to Know

Since 2006, the Financial Accounting Standards Board has been working on a new lease accounting standard intended to close the loophole of off-balance operating leases and to define what should and should not be included in lease accounting. One of the most significant changes to U.S. Generally Accepted Accounting Principles (GAAP) has finally arrived for nonpublic (private) companies and certain not-for-profit entities, titled Accounting Standards Codification (ASC) ASC 842 – Lease Accounting. Here’s what you need to know about the updated lease standard:

What Updates Are Included in ASC 842?

The new guidance includes several important updates, including:

  • Effective Dates: The effective dates for reporting under the new lease standard are for annual periods beginning after December 15, 2021 and interim periods, beginning after December 15, 2022.
  • Lease Characterization: Under ASC 842, the characterization of a lease has changed to include a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment (“an identified asset”), for a period of time in exchange for consideration. Due to the changes in the standard for the definition of a lease, you may have to review contracts that were not previously considered leases.
  • Reporting: With adoption of ASC 842, the majority of private companies will be faced with changing how they report their leases that have a term of more than 12 months. They will be required to record a liability on their balance sheet for the present value of the future minimum lease payments and an asset for the use of the leased premises, referred to as a right-of-use asset.

What Are the Key Differences?

While ASC 842 offers clarity to aspects of the lease standard, it also adds new complexities to the calculation of the lease liability and right-of-use asset. Along with balance sheet changes, ASC 842 presents significant changes to the required financial statement disclosures.

Six key differences under the new lease standard include:

  1. Definition of a Lease
  2. Lease Payments
  3. Discount Rates
    • The rate implicit in the lease which is used to calculate the current value of lease payments
  4. Lease Classification
    • Whether finance or operating, and should be determined at lease commencement
  5. Lease Recognition and Measurement
    • All leases with a term of 12 months or more
  6. Lease Modifications
    • A change to the terms and conditions of a contract resulting in a change in scope of the contract or lease consideration

Due to these reporting changes, key financial ratios used by companies to monitor financial outlook will need to be reviewed, as this new standard may distort the ratio results. In addition, companies with debt, which includes maintaining financial loan covenants, i.e., leverage ratios of debt to equity, will need to closely review these terms with their lender to see how the lease changes will affect their ability to meet and maintain these covenants. Further, from a comparison standpoint, the ratios from current year to prior year will be distorted, due to these lease changes.

What Are My Next Steps?

To ensure you are prepared for ASC 842, review your files, make sure you have updated copies of all your leases and know your lease terms. For leases that offer extension or renewal periods, consider renewal options and whether you will be exercising them.

If Janover performs an audit, review or compilation of your financial statements under GAAP, your Janover team member will be reaching out to you regarding information needed for the implementation for your business.

Leave a Reply

Your email address will not be published. Required fields are marked