Two of the most significant changes to U.S. Generally Accepted Accounting Principles (GAAP) have recently unfolded, including Accounting Standards Codification (ASC) 606 – Revenue Recognition, which many businesses are still adjusting to, and ASC 842 – Leases.
Although FASB has been delaying the effective date of ASC 842 – Leases, implementation time is almost here. As many owners and financial professionals begin to focus on year-end 2021 financial statements, they will not have to worry about the changes this year. However, implementation of ASC 842 – Leases is right around the corner. Nonpublic companies and certain nonprofits must begin to report under the new lease standards for annual periods beginning after December 15, 2021. For interim periods, the new standard is effective for periods beginning after December 15, 2022.
This new lease guidance will change the current reporting of a lease. Upon the adoption of ASC 842, nearly all businesses will be required to report leases on their balance sheet as a lease liability, along with an asset described as a right-of-use (ROU) asset. Even leases currently classified as operating leases will need to be recorded as such. Part of the standard identifies what a lease is defined as, and it is possible businesses might currently not believe they have a lease. However, under the new standards, they do. This will make it imperative to analyze all potential lease arrangements to date to decipher what is actually a lease under the new guidance.
The calculation of the related asset and lease liability, which will need to be recorded on balance sheets, may be complex depending on the situation. In addition, the standard makes substantial changes to required disclosures. Because of the reporting changes and the fact that leases will now be reported on balance sheets, many ratios and key performance indicators may change. Also, calculations involving outstanding debt with loan covenants may be subject to large variances from prior years.
Other issues to consider include:
- potential short-term leases that may meet an exception to be reported on the balance sheet
- variable lease payments
- concessions, and
- GAAP to tax differences.
ASC 842 – Leases will be an accounting change that will take considerable time to adapt to. Janover can help you prepare for and navigate these changes while supporting you with any lease implementation needs. Click here to contact us to get started today.