The Financial Accounting Standards Board (FASB) introduced Accounting Standards Codification (ASC) Topic 842, Leases, to provide more transparency and accountability in financial reporting. The standard requires lessees to recognize lease liabilities and right-of-use assets in their financial statements. Recognizing these assets and liabilities will provide key stakeholders with a clearer picture of an organization’s financial position and ability to meet its obligations. The new standard replaced previous guidance under FASB ASC 840 and went into effect for private companies on January 1, 2022.
The adoption of FASB ASC 842 can be a complex and challenging process.
To help ensure a smooth transition, here are 5 tips to consider when adopting the new lease standard:
1. Keep good records.
Documentation is an essential part of any adoption process. Organizations must keep detailed records of all leases, including the terms, conditions, and calculations used. It’s important to maintain accurate records and provide regular updates to ensure compliance with the standard. Don’t overlook the impact on your systems, processes, and internal controls.
2. Check your other contracts.
By definition, a lease is a contract, or part of a contract, that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. There could be leases embedded in other service related contracts where the organization has the right to control an asset as part of the contract. If the contract meets this definition, it should be included on your list of leases.
3. Use the practical expedients to your advantage.
They are there to help make the adoption a little easier. The practical expedients to consider utilizing are the short-term lease exception, combining lease and non-lease components, and using the risk-free rate. We would also recommend using the modified retrospective approach for the transition. This approach allows for the new standard to be applied to leases in place as of the effective date without restating prior period financial statements.
4. Educate key stakeholders on the impact this standard will have on your financial statements.
The number of leases you have can result in a significant increase in your assets and liabilities in the year of adoption.
5. Partner with a knowledgeable advisor.
Adopting the new lease accounting standard can be a complex process, and it is important to work with a knowledgeable advisor who can help you navigate the changes and ensure that you are in compliance with all requirements.
The adoption of FASB 842 is a significant change in lease accounting that requires careful planning and preparation. By following these 5 tips, organizations can reduce some of the challenges. For more information, read our article on the new lease accounting standard overview. If you’re ready to take the next step, please reach out to a Wegner advisor who can help guide you through the process!