Are You Prepared for the New Lease Standard?
December 7, 2021 | admin, Barton Walter and KrierAfter many delays, the Accounting Standards Codification (ASC) 842 is set to take effect for private companies. What does that mean for you? We’ll break down the basics to make sure you know what to expect and are prepared for the new lease standard.
The New Standard
Back in 2016, the Financial Accounting Standards Board (FASB) established ASC 842. The new lease accounting standard requires companies under current Generally Accepted Accounting Principles (GAAP) to recognize assets and liabilities for all leases on their balance sheets.
This applies to all operating leases with terms of more than 12 months. Previously, only certain leases – such as capital leases – were required to be reported on the balance sheet.
Public companies were required to comply with ASC 842 on reports for the 2019 calendar year. Private companies, however, were afforded a few additional years for compliance. Financial statements for fiscal years beginning after December 15, 2021, must now include the new lease standard. Likewise, this standard is required for inclusion on interim reports for fiscal years starting after December 15, 2022.
Why the New Standard?
The new lease standard provides transparency for understanding a company’s financial situation based on its balance sheet. Previously, operating leases were not visible, so potential future debt was hidden from financial statements. Most often, those obligations were explained in a footnote but not listed as liabilities on the balance sheet.
You may be wondering what qualifies as a lease under ASC 842. The lease in question must be a physical asset that is specifically identified and for which you have the right to use or control. Things such as equipment, real estate (or office space rental), and vehicles are just a few examples.
How to Be Prepared
As ASC 842 takes effect, you may need to reconsider the way you manage your company’s leases. Have a plan to:
- Record and classify your leases
- Gather relevant and measurable information on those leases
- Document details on your balance sheet, income statement, and financial statement disclosures
The best way to be prepared for the new lease standard is to have a strategy in place. Start tracking your leases and talk to the professionals at Barton, Walter & Krier. We are your trusted partner, providing premier accounting, tax, and consulting services for your business needs. And we can help you evaluate, summarize, and track your leases so you are in compliance with the new standards. Contact us today with your questions about ASC 842 and find out how we can help.