ASC 842 Lease Accounting: How Will Your Business Be Affected?
2019-08-12 | by Gene Reynolds
One of the most significant accounting changes this decade is the introduction of a new accounting standard, ASC 842, that will affect how business leases are accounted for.
The new lease accounting standard affects all types of businesses — publicly traded, privately held, and non-profits.
Fortunately, the ASC 842 effective date has been extended to January 2021 for private companies and non-profits. The governing body that introduced this new standard, FASB, recognized that smaller businesses and non-profits need more time to adjust for the new standard for lease accounting.
However, we do recommend that all businesses begin preparing to adopt the standard to ensure compliance.
ASC 842 Summary: What Exactly is Changing?
For business owners and managers, the main change is that any lease agreement will no longer just be a bill that is paid every month. Moving forward, anything that is supported by a lease agreement longer than 12 months must be treated like a capital lease that is reported on the balance sheet as an asset and liability.
For example, if you had a lease agreement with an office supplier to rent a high-volume copier for two years at a time, you likely treated the agreement like a bill. You paid the invoice each month in 24 installments, then you either returned the copier, bought the copier, or renewed the agreement for another two years.
Now, the ASC 842 accounting standard calls for that high-volume copier to be treated like an asset that helps produce income, no matter whether you intend to buy the copier or return the copier when the lease is up.
The specific language from FASB reads: “The new standard will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases.”
In other words, the high-volume copier becomes a living asset, not just a bill or expense lumped in with other expenses as part of the cost of doing business.
ASC 842 Implementation: The Biggest Challenge for Businesses
The biggest challenge for businesses adopting ASC 842 is determining the true value of any capitalized asset that has been leased for 12 months or longer.
Businesses will need to reverse engineer the value based on these key inputs:
- Date the asset was put into use per the terms of the lease agreement.
- Value of the asset at the time of the lease.
- Payments made on the asset.
- Present value of the asset at the time of the new classification.
This is not a simple process, especially for businesses that treated a leased capital asset like an invoice that was paid each month.
ASC 842 Support: Work with a CPA to Ensure Accurate Implementation
The process of implementing this change will require a significant amount of work, which is why FASB extended the lease accounting effective date.
One way to become an ASC 842 early adopter is working with a CPA firm such as Reynolds & Associates to expedite the process. Here’s how we can help:
- Evaluate lease agreement records to determine which assets apply.
- Determine the beginning and current value of qualifying assets.
- Adjust records in your software to ensure accurate record-keeping.
- Implement a method to pay the monthly bill the same way while calculating the new value in the software.
Our CPA firm will ensure that your records accurately reflect the value of each asset and bring your lease accounting into compliance with the new ASC 842 standard.
We can also help strategize how to structure future lease agreements that are aligned with the standard while still meeting the needs of your business.
Consider scheduling a consultation with our team to discuss how we can support the transition for your company. Complete our contact form, email email@example.com, or call us directly at 713-316-4560.
About the Author
Gene is the Founder and President of Reynolds and Associates, a Houston-based CPA Firm. He has spent 42 years helping Houston entrepreneurs navigate their enterprises thru both calm and stormy waters.