An accountant’s work is never done. If you are a public company, you’ve adopted ASC 606 and are feeling good, right? Well, don’t forget about the new leasing standard! A recent survey estimates that fewer than half of companies have started the transition process! ASC Topic 842, Leases, is effective for public companies on January 1, 2019 (and private companies on January 1, 2020), which is sooner than you think!
So, what’s changing as a result of adopting ASC 842? In a nutshell, all leases (with a few exceptions) will be recognized on the balance sheet! Other changes mostly relate to lessee accounting, which includes recognizing a lease using a “dual method” accounting approach. Additionally, leases can now be reassessed, and expanded disclosures are required. Still not 100% sure how to account for leases under ASC 842? Don’t worry - we wrote this blog outlining the biggest changes with the new leasing standard! Want to dig even deeper? Here is a compilation of accounting resources to help you out!
But what should companies be doing right now?
It is important to understand exactly what your company should be doing to prepare for the adoption of ASC 842. This Bloomberg article provides a summary of the overall implementation process. As you’ll see, the first step is to identify all leases. It is the tedious process of identifying every lease on the books, collecting the relevant data, and coming up with a plan! After the identification of leases, choosing the best software is important to help you compile all of your relevant data needed to account and disclose leases under ASC 842. All of this is going to take a significant amount of time, but depending on your line of business, the implementation of ASC 842 may not be as dreadful as ASC 606. Here are some tips that may help your company’s implementation process.
The leasing standard originally required that companies apply modified retrospective transition adjustments for two years before the effective date, and issue comparative reporting. Luckily, there is a new transition option that does not require completion of comparative financial statements. This allows an entity to recognize a cumulative-effect adjustment at the adoption date of the new standard. By taking away this comparability period, there is a chance that investors will be a bit blindsided by the leasing changes that are coming! So, while this new option for transition offers relief for us accountants, there is a chance that it will decrease transparency and the ability to compare financial statements for investors during the year of adoption. But on the flip side, more information than ever will be disclosed about leases, including providing a complete picture of a company’s lease obligations.
For the past few years, we’ve written blogs emphasizing the importance of preparing for ASC 606. We might sound like a broken record, but we want you to be prepared for this next big standard. Now is the time to implement a plan and a system to compile and account for leases under ASC 842! Any questions? We are here to help! We can customize a U.S. GAAP Update course for your company with a focus on ASC 842. And as referenced above, we have compiled a list of related resources. But here at GAAP Dynamics, we love chatting about all things accounting. Contact us with any questions you have today!
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