ASC 842: New Lease Accounting Standards Extended to 2022, But Private Companies Should Start Planning Now

In April, U.S. accounting rule maker, the Financial Accounting Standards Board (FASB), decided to offer private companies until 2022 to comply with major new lease accounting rule, ASC 842, which was supposed to go into effect next year, in 2021. The decision to issue a delay until 2022 came in response to the outbreak of COVID-19.

In a June press release, the FASB said, “For leases, the ASU provides an effective date deferral to private companies, private not-for-profit organizations, and public not-for-profit organizations that have not yet issued (or made available) their financial statements reflecting the adoption of the guidance. It is intended to provide near-term relief for certain entities for whom the leases adoption is imminent.”

Now, however, is a great time for those very organizations that have deferred to begin preparing for ASC 842. Here’s what you need to know – and do – now.

What is ASC 842?

Back in 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842), also known as ASC 842, to “increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions.”

ASC 842 came about in response to the lack of self-reporting companies have been doing to disclose how much money they have in lease and other rental agreements for things like office space, company equipment and vehicles. In short, lease accounting has historically been the mystery wild card on company balance sheets, oftentimes not even showing up at all. ASC 842 is meant to change all of that.

As reported by Bloomberg Tax, “Under long-standing lease accounting rules, companies kept most of these liabilities off their balance sheets, out of sight of investors and creditors.”

Public companies, on the other hand, adopted the new rules at the beginning of last year, in 2019. According to Accounting Today and a survey of 240 accountants, more cash flow opportunities were identified as a result of the new standard, as well as enhanced data transparency. “More than half of the public companies polled (58 percent) discovered embedded leases during their post-transition audit preparation, and 26 percent updated their internal controls for lease terminations and modifications.”

For private companies, there is an equal amount of opportunity and work to be done.

Implications of ASC 842

The single most significant change being put forth in ASC 842 is of course its lessee model, which aims to bring leases onto the balance sheet. The financial impact of failing to identify whether a contract is or contains a lease will be much more significant under the new leasing standard than it has been in the past. As a result, many companies are sharpening their pencils on lease identification in general. In accordance with the new standard, to fail to do this could mean exposing the business to compliance risks and fines. Publicly traded companies failing to comply with the new rules may be subject to fines from the U.S. Securities and Exchange Commission (SEC). For private companies, the financial impacts could arguably be even more catastrophic. In addition to fines and other penalties, they could risk investors pulling funds out and losing other financial backing.

What To Do Now

To comply with the new standard’s requirements (including those related to disclosures), entities may need to implement new accounting software. Tip: If you are currently relying on Excel or using a software made to only handle real estate, not leases, now is the time to begin preparing your systems for ASC 842.

Additionally, you should:

• Familiarize yourself with the new lease accounting standards. You can do this in house by designating a responsible accounting executive and/or by partnering with a finance and accounting subject matter expert close to the new standards to help you prepare.

• Establish a baseline understanding of existing lease contracts within your organization, including embedded leases. This may help you decide whether a technology or software solution is necessary. Ensure you have, or implement one if you don’t, a lease tracking platform and/or process that ensures your company is compliant with ASC 842.

About The Intersect Group

Founded in 2006, The Intersect Group is part of the MSouth portfolio of investment companies and operates in Atlanta, Dallas and Charlotte. Specializing in the recruitment of technology and finance and accounting professionals, The Intersect Group provides clients with the means of finding the best talent on the market.

If your organization could benefit from our technology and finance and accounting expertise, please get in touch with us! We are here to support you through the transition and adoption of ASC 842.