By Ane Ohm
Dec. 15, 2021, is the effective date for the new ASC 842 lease accounting standard for nonpublic companies. That means you will be called upon to help clients with implementation – if you haven’t been already. It’s true: implementing the new lease standard requires changes to processes and reporting controls, but after many conversations with CPA firms it seems that clients with 20 or fewer leases have drastically reduced complexity.
Here are four reasons why implementing the new lease standard may not be as hard as you or your clients feared it would be and how you can help.
Firms can start by helping clients assess the accounting policy elections and the practical expedients available. Both of these will simplify implementation. For example, by adopting the “package of three” practical expedients for leases that exist on the initial application date of the new lease standard, clients limit the information needed to comply with the new standard:
- Lease identification – No need to examine existing contracts to determine if they contain a lease under the new lease standard.
- Classification – Do not need to reassess whether the lease should be classified as operating or finance under the new lease standard. Instead, if you properly classified the lease as “operating” under ASC 840, it is “operating” under ASC 842. A capital lease under ASC 840 is a finance lease under ASC 842.
- Initial direct costs – Despite the change in definition for initial direct costs, you do not need to reassess these costs for existing leases.
With the adoption of the “package of three” and some easy-to-use software, clients can get in line with the new lease standard fairly quickly. For transition leases, which are the leases that exist on the initial application date of the new standard, they only need the following information:
- Lease term – Should consider early termination and renewal provisions.
- Asset details –Type, description, and location.
- Lease classification – Capital leases are now called finance leases, and operating leases continue to be operating leases.
- Discount rate – Clients can use the federal risk-free rate or collateralized borrowing rate.
- Lease payments after the initial application date – Include termination penalties, bargain purchase options, renewal term payments, residual value guarantees.
- Existing balances for leases on the balance sheet as of the initial application date – Include deferred rent and capital lease asset/liabilities.
With the “package of three,” the new lease standard is complicated only if you perform the initial and ongoing calculations using a spreadsheet. You may want to collect the lease data in a spreadsheet, but leave the calculations to cost-effective software.
While determining the initial journal entry is relatively straightforward, the footnote disclosure calculations and any future lease revisions are not simple.
Discount Rate Update
The Financial Accounting Standards Board (FASB) has recognized the need for additional flexibility on determining discount rates. As a result, the FASB made a recent update to the discount rate guidance that makes implementation simpler for organizations: nonpublic companies may elect to use the risk-free rate by asset class.
What does this mean? Organizations can now take extra time to calculate what is likely a higher collateralized borrowing rate for their largest dollar-value leases, such as office space. For lower-value assets, such as vehicles or small equipment, the impact of using the more easy-to-determine risk-free rate is twofold: it saves time and the impact to the lease liability is likely far less material.
Resources Are Available
Clients are going to come to you for guidance. There are many webinars, videos, and CPE courses available to you to learn more about the lease accounting standard so you can help your clients with implementation. There is also a plethora of resources available to clients, such as lease abstraction tools, embedded lease identifiers, checklists, guides, and calculators. Clients can use these tools to review what’s available and to help keep them from becoming overwhelmed.
With any new accounting standard, it can be tempting to wait until the last minute to get started. For the new lease accounting standard, however, the sooner your clients get started the easier implementation will be.
Again, it’s important to remember that most organizations have fewer than 20 leases, so implementation will not be overly challenging. While many will try, you should encourage clients not to push it off. As long as they take advantage of practical expedients, transition leases, the discount rate update, and the resources and tools available, this should be doable without too much stress.
Ane Ohm is CEO of LeaseCrunch, a cloud-based lease accounting software company in the Greater Milwaukee area. She can be reached at email@example.com.
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