FASB ASC 842 Lease Accounting Changes

The Financial Accounting Standards Board (FASB) ASC 842 lease accounting standard has brought about significant changes in how companies account for leases. Whether you are a business owner, manager, or non-accounting professional, it is crucial to understand the implications of this standard on a company’s finances. In this blog post, we will provide an overview of FASB ASC 842, explore its potential impact on businesses and how to comply with iLeasePro lease accounting software.

What is FASB ASC 842?
FASB ASC 842, also known as Accounting Standards Codification Topic 842, is a lease accounting standard developed by the Financial Accounting Standards Board (FASB). It aims to enhance transparency and comparability in lease accounting by requiring companies to recognize lease assets and liabilities on their balance sheets.

Key Changes Introduced by FASB ASC 842:
1. Balance Sheet Impact: Under the previous standard (ASC 840), operating leases were typically not recognized on the balance sheet. ASC 842 requires companies to recognize most leases with a term of more than 12 months as both an asset (right-of-use asset) and a liability (lease liability).

2. Lease Classification: ASC 842 introduces a revised approach to lease classification. Previously, leases were categorized as either operating or capital leases. Now, leases are classified as either finance leases or operating leases. The classification depends on factors such as the transfer of ownership, purchase options, and lease term.

3. Enhanced Disclosures: ASC 842 places a greater emphasis on providing detailed disclosures related to leases in the financial statements. Companies must disclose information about the nature, terms, and risks associated with their lease agreements.

Impact on Company Finances:
1. Balance Sheet Changes: The inclusion of lease assets and liabilities on the balance sheet can significantly impact a company’s financial position. It increases the company’s total assets and total liabilities, which can affect financial ratios and key performance indicators (KPIs) used by investors, lenders, and other stakeholders to evaluate the company’s financial health.

2. Profitability and Expenses: ASC 842 may impact a company’s profitability and expenses. Previously, operating lease payments were recognized as an expense over the lease term. Under ASC 842, operating lease expenses are separated into lease expense (reflecting the interest on the lease liability) and amortization expense (reflecting the depreciation of the right-of-use asset). This separation may affect the timing and amount of expenses recognized in the income statement.

3. Improved Decision Making: With lease liabilities and assets now recorded on the balance sheet, stakeholders can gain a clearer understanding of a company’s leasing commitments and obligations. This enhanced transparency can aid decision-making processes, such as evaluating the financial impact of future lease agreements, negotiating lease terms, and assessing the overall risk exposure related to leases.

FASB ASC 842 brings significant changes to lease accounting practices and impacts a company’s financial statements. Understanding the implications of this standard is crucial for company executives as it provides insights into the financial health, risk exposure, and decision-making processes related to leases. It is advisable for businesses to work closely with accounting professionals and leverage appropriate software systems to ensure compliance with the new lease accounting requirements outlined in ASC 842. By doing so, companies can navigate these changes effectively and maintain transparent financial reporting practices.

For more information on the FASB ASC 842 please go to: https://www.fasb.org/leases

Interested in increasing your understanding of the ASC 842 and Lease Accounting?  Read more at https://blog.ileasepro.com/. You can take a video tour of iLeasePro or schedule some time on our online demo calendar to see how iLeasePro can help you and your firm comply to the ASC 842 Standard.