Public corporations have already started using the new lease accounting standard (ASC 842) from the Financial Accounting Standards Board (FASB). Private enterprises received a delay because of the COVID-19 pandemic’s difficulties but are now required to implement the new lease standard for fiscal years commencing after December 15, 2021, as well as interim financial periods within those fiscal years commencing after December 15, 2022.
What Is the Goal?
According to the FASB, the objective of the new standard is “to promote openness and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and revealing critical information regarding leasing agreements.”
To that end, the balance sheet will now contain the majority of lease liabilities with durations of more than twelve months, as well as the right to use the asset designated in the lease during its term, which is a substantial change under the new standard. Many leases used to only be declared in the notes to the financial statements, not on the balance sheet.
How to Get Ready for the New Lease Accounting Standard
If you feel like you are lagging in preparation for the new lease accounting standard, you are not alone. For many accounting firms, there is often not enough time in their typically hectic daily operations, but the good news is there is a way through the many compliance challenges. Here are a few simple steps that can help you implement the new lease accounting standard successfully.
1. Identify the Project Leader
The project leader should be knowledgeable about the accounting standard on a technical level. They should also have strong interpersonal skills because this job frequently necessitates collaborating with many departments in order to locate and extract precise information from leases.
The new norm will be unfamiliar to many, and they may object to what they see as an imposition. Effective communication strategies can increase staff buy-in generally, improving success chances.
2. Create a Schedule for Implementation
Outline the tasks that must be accomplished, in what order, and whose major responsibility they are. Schedule important implementation milestones now by working backward from the compliance deadline.
Give your team members enough time to finish their allocated duties and become familiar with the details of the new requirements.
3. Prepare Your Data
Learn more about the leases you have throughout your entire business to be ready. Collect your lease accounting data first. Be meticulous in how you collect your data, regardless of whether you have a large or small portfolio of leases.
If you believe it is impossible to complete the task on your own, bring in a professional who can provide you with a straightforward procedure for compiling the most crucial information for your leases.
Don’t forget to work together with important stakeholders. Many businesses are unaware of every leasing deal they have. Establish and distribute a method for departments to report their leases in order to close this visibility gap.
4. Determine the Calculation Method
When it comes to handling lease accounting computations, organizations have two options: performing manual calculations or investing in a software solution. While using spreadsheets to do calculations could be sufficient if there are just a small number of leases, as an organization’s leasing activities expand or become more sophisticated, the calculations become laborious and error-prone.
Firms with a lot of lease agreements or complicated lease agreements will benefit from the enhanced calculation controls and automatic aggregate of lease information provided by specialized lease accounting software.
5. Plan for Ongoing Compliance
The new lease accounting standard is here to stay. Set up your business for success by embracing a framework for compliance now and starting to integrate the process into your current procedures. Whatever strategy you choose, the most crucial thing to remember is to get started immediately.
Final Thoughts
By being ready for the new lease accounting standard in advance, you can make sure that your business follows generally accepted accounting principles (GAAP) and, as a result, make it easier for third parties, including lenders, to use your financial statements. Even though there is a lot to do to prepare, using these five best practices can help you stay in compliance, enhance lease operations, and cut expenses.
