The new lease accounting standards under FASB ASC 842 are now in effect for most entities. If you’re like many, you’re still figuring out what you need to do to implement them. Here are 10 considerations for a successful implementation.
1. Assign Responsibility
Depending on your organization’s lease portfolio, implementation of the new lease accounting standards can be a significant undertaking. Implementation efforts will be more successful with an identified project manager and a cross-functional team to help identify leased assets.
2. Understand the New Requirements
Take the time to wrap your arms around the new accounting requirements. If you’re seeking resources, Sikich has prepared an ASC 842 Lessee Handbook that provides you with the foundational understanding and confidence to tackle implementation. The ASC 842 Lessee Handbook does not require a significant time investment to get started. If you’re more of a listening learner, we also have two 1-hour recorded webinars: Session 1 and Session 2.
3. Make Decisions About Policy Elections
ASC 842 provides several practical expedients for lessees that can have a significant impact on recorded balances (read our related insight here). It’s important to both understand the impacts of these policy elections and document your decisions. The ASC 842 Lessee Handbook includes a two-page policy election template to make this easier.
4. Discuss Impacts with Business Partners
There are a number of implications of adopting the new lease accounting standards, several of which we discussed in a prior insight. If you have creditors or other business partners who utilize your financial statements, it is vital to have a conversation about the impacts on your financial statements and ratios before year-end.
5. Gather Lease Contracts
Identifying the population of lease contracts is more challenging in large, decentralized organizations. A potential challenge for all organizations is ensuring “embedded leases” have been identified and properly accounted for.
6. Review Final Balances Reported Under ASC 840
Existing balances related to lease accounting under ASC 840 are critical parts of implementing ASC 842. Balances – such as deferred rent, prepaid rent, unamortized lease incentives, capital lease liabilities, capital lease assets and related accumulated amortization, ASC 420 exit obligations, and more – are part of determining beginning balances under ASC 842. You may need to correct errors in these existing balances, if significant, before application of the new standards, as they are not to be included as part of the cumulative effect adjustment upon adoption.
7. Understand Discount Rates
Determining the discount rate for each lease may be a challenge based on the type of discount rate that you’re required to use. Read more about implicit rates, incremental borrowing rates and risk-free rates in this prior article.
8. Determine Fair Values of Leased Assets
The fair value of a leased asset is used for lease classification and may be an input in determining the discount rate. Complications can arise when trying to determine the fair value of a leased asset that is only a portion of a larger asset (e.g., one floor of a multi-story building). There is a transition practical expedient to not reassess lease classification (assuming it was classified correctly under ASC 840); however, auditors may still ask for evidence of that determination at the ASC 842 application date. For entities not utilizing that practical expedient, there is a higher chance of finance lease classification if electing to combine lease and non-lease components (see #3 above!).
9. Document Related Party Lease Agreements
Related party leases (discussed in this insight) continue to be a bit of a “gray area.” While ASC 842 is clear that related party leases are in scope and should be accounted for on the basis of legally enforceable terms and conditions (same as leases between unrelated parties), the nature of related party relationships may make what is “legally enforceable” less clear. We recommend that organizations formalize and document related party leases, using terms that are reasonable considering all other factors, to reduce the burden of making these assessments on your accounting teams and auditors.
10. Select a Lease Accounting Software Solution
A software solution is highly recommended, as it will help ensure accurate calculations, aggregate data for note disclosures and support ongoing compliance efforts. Software solutions are not one-size-fits-all, as discussed in this prior article. To simplify the process, Sikich developed an easy-to-use, Excel-based solution, Lessee Ledger.
Implementing the new lease accounting standards can be a daunting task, and Sikich’s professionals are here to help. Contact our experts to learn more about the new lease accounting standards and our lease accounting solution, Lessee Ledger.