While the new lease accounting requirements are effective for fiscal years beginning after December 15, 2021, businesses are not required to present financial statements in accordance with ASC 842 until annual statements for the first year under the new standard are issued. When speaking with businesses about effective dates, the realization that interim reporting during 2022 is not required to reflect ASC 842 adjustments hits management with an, “oh…,” and the renewed procrastination is audible. We know they’re thinking, “we still have another year then!”
It’s true. While the new requirements are effective for calendar year entities starting January 1, 2022, financial reporting in accordance with GAAP will not reflect the new lease accounting requirements of ASC 842 until the financial statements for the year ending December 31, 2022 are issued.
So, we do have another year then, right? We can wait until we close the books for 2022 and perform the calculations as of year-end? Sorry, but the answer is no. Further delay in implementation won’t make things easier. In fact, it may make things more complicated.
ASC 842-10-65 requires that transition disclosures be made in accordance with ASC 250, Accounting Changes and Error Corrections. One of those requirements is to disclosure the cumulative effect of the change on retained earnings (or other components of equity or net assets) in the statement of financial position as of the beginning of the earliest period presented. For entities electing the effective date transition method (forgoing comparative reporting in the year of adoption), the cumulative effect disclosure is made as of the beginning of the period of adoption. As such, you’ll likely need to perform calculations as of the effective date – not as of year-end – in order to determine the amount to disclose.
Additionally, if lease activity is recorded in accordance with ASC 840 during 2022, you may need to correct misstatements in income statement activity for the year. While ASC 842 results primarily in balance sheet changes, the income statement can be impacted as well. These impacts can’t be ignored for the first year of adoption. And the longer an entity puts off implementation, the more significant these impacts could become.
As you can see, waiting until the end of the year won’t save you from having to perform calculations as of the beginning of the year, as well as for the income statement activity during the year. You would only be delaying the inevitable.
There really isn’t any more time to wait. Entities should prepare for transition to ASC 842 now. Ideally, entities will be comfortable with the ASC 842 transition in early 2022 and enable their auditors to perform related audit procedures during interim fieldwork prior to year-end.
Sikich professionals are ready and eager to assist with your implementation efforts. Contact us today to learn more about the new accounting requirements and resources we have to help with adoption.
This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. In addition, this publication may contain certain content generated by an artificial intelligence (AI) language model. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.