We all hate deadlines, but let’s not argue about their ability to motivate us. That’s why we’re all familiar with the coffee-fueled, eleventh-hour crunch and the feeling of bringing that project or presentation into homestretch as the clock strikes 12. The new lease accounting standard deadline has either hit you, or it will soon. That’s because the new standard took effect Jan. 1, 2022 for all calendar year-end companies and will impact your Dec. 31, 2022 year-end audit. But whether you’re in the middle of the final-hour frenzy or you’re exhaling a sigh of relief at having overcome the long-awaited due date, now is the time to ask: what happens once your ASC 842 deadline has passed?
When it comes to the new lease accounting standard, you might be thinking, “I already went down that road,” but implementing ASC 842 is only the halfway point on the ride. Just like your car, your lease portfolio and the checks-and-balances for the accounting standard require tune-ups and check-ins. Here’s a run-down of some things to consider:
Turn Your Adoption Team into Your Maintenance Team
The new lease accounting standard, ASC 842, means your team and others in your company will need ongoing education on how to handle both future and existing leases, including service contracts that potentially contain a lease. As leases are executed, modified or renewed, you’ll want a good handle on terms and agreements so you can ensure compliance with the lease accounting standard. One example is when there is a significant event within your control as lessee that directly affects whether you’re reasonably certain to exercise an option to extend or terminate the lease. If you decide to wind down operations at a location, then the lease liability and asset are remeasured. Another significant change is determining when to derecognize a right-of-use asset if a lease is going to be abandoned. Team members need to know what to look for in terms of changes, and how to handle them when they occur.
A Hard Look at Software
Because the new standard involves significant differences to the ways leases are identified and recorded, many companies have looked to lease technology to more cleanly keep track of their lease portfolio.
Tuning in to technology goes beyond what you did — or didn’t — implement during adoption. In time, you might find that you can save resources by having lease management software do the heavy lifting when it comes to tracking and accounting for leases. You can also ensure accuracy this way.
All tools need to be tested, and that is no less true for your lease-accounting software. Don’t miss the vital step of bringing in auditors or experienced accounting providers to run tests and set controls.
What does the Future Hold (for Your Leases)?
There’s a good chance your workplace looks differently than it did before the initial shockwaves of the coronavirus. Many companies have instituted remote and hybrid work arrangements, and for some, those arrangements have become key to recruiting and retaining top talent.
But, that also means you might want to take a close look at what kinds of leases best serve this new reality. Short-term leases stay off the balance sheet with ASC 842 and might be a good option if your physical workplace is in flux.
In other words, once the new lease accounting standard is in place, you might want to step back and take a look at things from a thousand-foot view, thinking about the relationship between how workplaces are changing and what your company’s needs are in terms of recruiting and retention. Then, consider how the leases you have in place serve, or don’t serve, these larger considerations.
Translating the Balance Sheet
With the new lease accounting standard in place, your balance sheet will look different. All operating leases, except for short-term operating leases, will now be included on your balance sheet in the form of a right-of-use asset and lease liability. The CFO will need to be equipped to communicate these key changes to stakeholders, helping them understand where and why numbers have shifted. Having an accounting professional walk you through the ins and outs of those changes will prepare you to communicate effectively and answer any questions as they arise.
Visit our resource center or download our free eBook for more ASC 842 guidance. Contact us to get the support you need wherever you are on your ASC 842 journey — whether that be in the middle of implementation or looking into the future.
Published on August 30, 2022