ASC 842 Comprehensive Guide

After much anticipation, the Financial Accounting Standard Board (FASB) leasing standard (ASC 842) went into effect for privately held and non-profit organizations for fiscal years beginning after December 15, 2021.

This standard increases the disclosure and visibility of the leasing obligations of both public and private organizations, transforming the balance sheet of every public and private organization. The standard was enacted to provide additional insights into an organization’s contingent liabilities to the users of financial statements as both leased assets and liabilities will be presented.

The standard also clarifies the definition of operating and financing leases and requires additional disclosures.

Why Did FASB Publish ASC 842?

ASC 842 replaces the original lease accounting standard – ASC 840 – and was published for three main reasons:

1.  There are 1.25 Trillion off-balance sheet operating lease commitments (for SEC registrants)
2. Most lease assets and liabilities are currently off-balance sheet
3. There is limited information about operating leases

In efforts to lessen the impact of ASC 842 on your organization’s financial close process, there are steps you can take now.

1. Consider discussing with your bank representative, or other statement users, if a departure from generally accepted accounting principles (GAAP departure) relating to ASC 842 is acceptable. A GAAP departure includes an explanation in the report and disclosures that explain what principle is not being followed and the effect on the financial statements.  A GAAP departure is not uncommon and, in some cases, might be preferred.
2. Begin to gather your documents related to all your leases.  Also, consider service agreements that have a physical asset associated with the agreement.  This step may require additional conversations within your organization.   In some instances, you may be “leasing” a piece of equipment that is associated with a service agreement.  Your accountant can help you determine if additional analysis is needed to determine if ASC 842 applies to these agreements.
3. Connect with your accountant about the calculations required to conform with the standard.  Be prepared to discuss implementation dates, discount rates, related party leases, policy elections, and the formatting of comparative statements.  There are practical expedients associated with the standard to ease the transition to ASC 842.  In preparing the calculations associated with ASC 842, you may want to consider the use of a leasing software. KatzAbosch has software we will be using that our clients can access as well.

Watch to learn about the key changes that occurred due to the new standard.

New Leasing Standard ASC 842 – Video Part 1 Covers:

• Overview of the key changes
• What is the new lease definition
• When does it apply
• A brief overview of transition dates and methods

New Leasing Standard ASC 842 – Video Part 2 Covers:

• Overview of new classifications
• Review of service agreements
• Embedded leases and how to identify
• Master leases and what has changed
• Discount rates and other documentation needed for calculation

New Leasing Standard ASC 842 – Video Part 3 Covers:

• Overview of FASB’s guidance and the complications it still invokes
• Scenarios for Month-to-Month Leases on a Balance Sheet
• Impact on Commonly Owned Companies

New Leasing Standard ASC 842 – Video Part 4 Covers:

• Overview of the common challenges with the use of spreadsheets
• Review of the essentials and customization features software provides for the implementation
• Commentary on why software can help make your implementation less complicated and save you time

How KatzAbosch Can Help with ASC 842

The new lease accounting standard, ASC 842, requires organizations to think about the business impacts it will bring not only during implementation but beyond.

Connect with one of our professionals today to understand how to have a smooth implementation process and one that will work for your compliance matters. Additionally, utilize the resources on this page to reinforce your understanding of the provision and some of the best practices for implementation.