New Lease Accounting Standards
Regardless of the nature of your operations, nearly all organizations have to implement the new and complex lease accounting standards – which will dramatically change how you account for some leases. Are you ready?
The new lease accounting standards, under FASB ASC 842 and IFRS 16, are already effective for some organizations. Upcoming effective dates for entities that have not yet implemented are as follows:
- FASB ASC 842 – effective for non-public entities for financial statements issued for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022.
- GASB S-87 – effective for fiscal years beginning after June 15, 2021 and all reporting periods thereafter.
NAVIGATING THE LEASE ACCOUNTING STANDARDS IMPLEMENTATION
As organizations are now expected to understand and follow the new lease accounting standards, it’s important to comply with generally accepted accounting principles. Our team has the knowledge, tools and resources to support you through the process.
EDUCATION AND POLICY ELECTIONS
The first step to implementing the lease accounting standards is understanding the new requirements and accounting considerations. What changed from the prior standards? Do you have contracts that contain a lease but were not previously accounted for as a lease? What new policy elections do you need to make? What practical expedients are available, and which will you use? What data points do you need to collect from lease agreements? How will the new standards impact your financial reporting, from new general ledger accounts to financial statement presentation and note disclosures? Turn to our experts for answers to all your questions.
Once you understand what qualifies as a lease under the new standards, a significant amount of time may be spent collecting the data needed for compliance. You will want to consider more than just your traditional lease agreements to identify other agreements that may contain embedded leases. Your accounting team will work with you, other decision-makers and managers throughout the organization to identify all contracts that are, or contain, leases. For decentralized organizations, this may require more time and effort.
Now that you’ve identified all your lease contracts, you will need to obtain copies of these and summarize pertinent data points to properly account for your leases in your financial statements. There are more than 30 data points that may need to be considered for initial lease liability and right-of-use (ROU) asset measurements. That number increases depending on policy elections and with more complex lease agreements. It is important to have a well defined process to ensure the right data is collected, leases are not duplicated within the summary, the format will facilitate use for calculations and that the data has been reviewed for accuracy. Sikich has developed a data collection tool to help you identify and organize over 50 data points and decisions that may be relevant for implementation.
ACCOUNTING SOLUTION SELECTION
You have all the necessary lease data organized, but how are you going to turn that into measured lease liabilities and ROU assets, journal entries and quantitative disclosure summaries for the notes to financial statements? Selecting the right accounting solution for your organization is critical. Our team has developed a spreadsheet-based calculation tool for many organizations reporting under FASB ASC 842. For organizations that need, or prefer, an alternate accounting solution, our professionals can help you select a solution with the appropriate features and capabilities for your organization.
Depending on the accounting software solution you select, you will begin entering contract terms (one-by-one or possibly through bulk import functionality). Design and implement controls around this process to ensure that all contracts are entered accurately and that data is properly accumulated for journal entries and financial statement note disclosures.
Once lease contract terms are entered into your accounting solution and you’ve made accounting transition adjustments, the work is not done. You will have periodic journal entries and financial statement disclosure summaries. You may need to also update calculations for changes in circumstances requiring remeasurement or for lease modifications.