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By Sheila A. Border, CPA

With the onset of the coronavirus pandemic, the Financial Accounting Standards Board (FASB), AICPA, and other standards-setting bodies have decided that organizations and practitioners need more time to learn and implement new standards as we work in a restricted world. The new standard on lease accounting is one such change that has been delayed – but make no mistake: it is coming.

FASB issued a deferral for the effective date of Accounting Standards Update (ASU) 2016-02, Leases Topic 842, and all related amendments, for nonpublic entities, to fiscal years beginning after Dec. 15, 2021. So, 2022 is the first calendar year nonpublic entities will be required to apply the new leasing standard.

That may seem far enough in the future to put it on the back burner, but I encourage you not to. For those who have recently been through implementation of ASU 2014-09, Revenue from Contracts with Customers, you know that it was a comprehensive exercise. Even those organizations that did not have a dollar impact were still required to apply the five-step process, analyze, and complete new and expanded disclosures.

On the surface, ASC 2016-02 may seem straightforward, but take another look. The new rules have some twists and turns, and, you guessed it, expanded disclosures. So, what steps can we take now to allow for an easier transition in 2022?

The following six steps are offered as a miniproject that lessee organizations and CPA practitioners alike can undertake to be better prepared for implementation.

Create an Inventory of Leases

Organizations generally have a good handle on what they are leasing, but for this exercise you will need to track down all lease documents. Review those leases and determine those for which you have a signed current document and those for which you do not. Where you believe initially there was a lease document, make inquiries of the lessor to get a copy. For lease arrangements that may not have a written document, determine and document the terms you know, such as what is being leased, for how long, and the payment terms.

Is It Complete?

Review your inventory of leases and determine if each contract qualifies as a lease based on the definition in ASC 842 (ASC 842-10-15-1). Also, consider if you have other arrangements that meet the definition and therefore, should be included in your inventory of leases.

What Lease Terms Do You Have?

Carefully consider the terms of leases with renewal options and those leases with stated terms of one year or less. Review the guidance in ASC 842 (ASC 842-10-55-23 to -26) to determine the lease term that applies to each lease. For short-term leases (ASC 842-20-25-2 to -4), determine if your organization will elect to not apply the recognition requirements of ASC 842 as an accounting policy election. This is an election, made by class of asset, for leases that have a term, per the definition in the standard, of 12 months or less.

Take a Step Back

At this stage, review the inventory of leases you have compiled that will be subject to ASC 842. Consider if it is manageable to track and analyze, determine accounting entries, and prepare disclosures with the use of a spreadsheet or if the number of leases may warrant a specialized lease software product. There are numerous options, so reviewing and assessing which will work best for your organization will take some time.

Classify

Make an initial determination of the types of leases you have in your inventory by reviewing ASC 842-10-25-1 to -7. Under the new standard, all leases (with limited exceptions) will be reported on an entity’s balance sheet as an asset and a liability. However, the treatment of expensing and reporting the lease payments will vary. Leases will either be reported as finance leases (asset amortization and interest expense) or as operating leases (single lease expense recorded on a straight-line basis).

Practice!

Now, take a few of your leases and, based on the lease classifications, calculate the asset and liability that will be recorded upon adoption of ASC 842, determine the recording of payments and expense, and financial statement presentation and disclosures. Do the exercise one lease at a time. Review ASC 842-10 and 842-20 for guidance. Those in industry can get help from their CPA firms, and CPA practitioners can find help from other practitioners.

This blog just covers the basics. As you work through the various sections of ASC 842 and become more familiar with it, you will see other areas to consider for your inventory of leases, such as lease modifications, subleases, discount rates, variable lease payments, purchase options, residual values, among others.

For organizations, this exercise should enable you to feel comfortable and more confident in adopting the new standard and let you know where you need further analysis and discussion before implementation.

For CPA practitioners, this could be a great exercise by volunteering to assist with one of your clients on a trial basis. The hands-on experience would be a great benefit for your client and would help you gauge what to expect when all of your clients are adopting the standard and updating financial statements and disclosures. It may even help you establish early some best practices for your firm before implementation.

Sheila A. Border, CPA, is a senor manager at Wipfli LLP in Media, Pa., and a member of the Pennsylvania CPA Journal Editorial Board. She can be reached at sborder@wipfli.com.

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