A new lease accounting standard—namely, Accounting Standards Codification (ASC) 842—has made significant changes to accounting practices for operating leases, causing major frustration for large and small companies alike.
But it doesn’t have to.
Here, we’ll explore the ins and outs of the new accounting standard so you can answer questions such as:
- What is ASC 842?
- How does it differ from the previous standard, ASC 840?
- How will ASC 842 affect your business?
- What is the best way to maintain compliance?
What Is ASC 842?
In February 2016, the Financial Accounting Standards Board (FASB) issued a new Accounting Standards Update (ASU) amending guidelines for accounting lease contracts. ASC 842 replaces the former guidance outlined in ASC 840, increasing disclosure on balance sheets.
Essentially, the new standard dictates that companies must include all lease obligations—both lessee and lessor—in their financial statements, whether or not the lease is considered operating or financing. Companies must now be more transparent in disclosing their financial situations, including the strength of their leases’ cash flows and overall value.
Although ASC 842 was issued in 2016, the changes were not set to be adopted by public companies until January 2019 and private companies fiscal years beginning after December 15, 2021.
ASC 840 vs. ASC 842: What Changed?
Under the former guidance set by ASC 840, operating leases did not have to be included on any balance sheets. Instead, the expenses associated with these leases could be included in income statements alone.
Now, with ASC 842, companies with lease assets must include on their balance sheets all leases longer than 12 months, operating or financing. which is the key difference between ASC 840 and 842.
Beyond this, ASC 842 differs from ASC 840 in its requirement for:
- Lessees to recognize leases longer than 12 months as right-of-use (ROU) assets on balance sheets
- Lessees to assess such leases as liabilities on balance sheets
- Lessees to clearly recognize leases as operating or financing
Looking Ahead with New Compliance Standards
Due to these new compliance revisions, many organizations have worried over whether they will experience significant changes to their accounting practices, let alone their business profitability.
While the new compliance standards will change some accounting procedures and add a level of complexity, companies who have maintained their data integrity over the years will avoid disorder and massive disturbances. The lease accounting industry is dynamic and just like your company has adapted in the past, it can adapt now to this new standard.
Property Works is here to help.
Because ASC 842 demands more thorough data tracking and auditing, it is recommended to forgo manual input into spreadsheets in favor of automated lease-accounting software. The benefits of such software include an easily auditable data trail and precise calculations making disclosure a simple matter of data entry.
And unlike other lease-management software, Property Works’ web-based lease-management platform is designed specifically for tenants. Our solution helps businesses more easily meet compliance standards by:
- Tracking and calculating finances for ASC 842 compliance and overall lease accounting
- Accurately classifying individual leases as either operating or financing
- Standardizing existing and new data
- Managing documents in support of insurance requirements and ASC 842 compliance
- Tracking agreements on leases, franchises, area developments, and associations
- Generating sales statements, data trails, and AP files
By taking the complexity of ASC 842 off your shoulders, Property Works’ lease-management platform allows your team to focus on the most pressing matters of your core business.
Learn more about our lease-management platform here to ensure your ASC 842 compliance.