Implementing new processes and internal controls is crucial for ensuring accurate and timely lease accounting under the new standards. Here are some key processes and controls to consider:

1. Lease identification and inventory: Establish a process to identify and track all lease agreements, including embedded leases within service contracts or other arrangements. Maintain a comprehensive lease inventory with relevant information such as lease terms, payment schedules, and classification.
2. Lease classification: Develop a consistent methodology for classifying leases as operating or finance leases based on the new accounting standards. Implement a review process to ensure lease classification is accurate and consistently applied.
3. Lease measurement and calculations: Create a standardized process for calculating lease liabilities and right-of-use (ROU) assets, including determining appropriate discount rates and lease terms. Implement controls to ensure accurate and timely calculations.
4. Journal entries and account reconciliations: Develop a process for recording lease-related journal entries and reconciling lease accounts in the general ledger. Implement periodic account reconciliations to verify the accuracy of lease balances and transactions.
5. Lease modifications and reassessments: Establish a process for identifying and accounting for lease modifications, such as changes in lease terms or payment amounts. Regularly reassess lease agreements for any changes that may require adjustments to lease accounting.
6. Disclosure and reporting: Implement a process for preparing lease-related disclosures and reporting required under the new accounting standards. Ensure that the financial statements accurately reflect lease transactions and balances.
7. Staff training and communication: Provide training and resources to accounting staff to ensure they understand the new lease accounting standards and can apply them accurately. Establish clear lines of communication to address questions and concerns related to lease accounting.
8. Segregation of duties: Implement segregation of duties to minimize the risk of errors or fraud in lease accounting. For example, separate responsibilities for lease identification, measurement, and journal entry recording among different individuals.
9. Periodic review and audit: Perform regular internal reviews or audits of lease accounting to ensure compliance with the new standards and identify areas for improvement. Address any identified issues or discrepancies promptly.
10. Continuous improvement: Monitor changes in lease accounting standards, guidance, and best practices to ensure your company’s processes and controls remain current and effective. Continuously refine and improve lease accounting processes and controls based on feedback, experience, and industry developments.

Try iLeasePro for free right now; https://www.ileasepro.com/signup/free/

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.

The recent changes in ASC 842 along with the Coronavirus pandemic have come together to unleash a plethora of chances in how leased assets are treated – not just for the lessee but for the lessor as well. One significant impact of the two happenings is that leases need to be recorded as a liability and a corresponding asset, and that companies hit hardest by the pandemic are starting to lease out their assets (respectively). 

ASC 842’s changes about recording leases as an asset and a liability are also applicable on right-of-use assets (ROU assets), and will therefore be subject to the same impairment standards as set for other assets under ASC 360 (Property, Plant, and Equipment). 

On top of that, once an organization starts adopting the new ASC 842 changes, they will have to cease the application of ASC 420 (Exit and Disposal Costs) to all their lease arrangements. Since losses can be recorded long before they actually occur, if an organization has put any liabilities in their books that reflect the standard, i.e., were recognized as exit/disposal costs with respect to a leased asset, it will have to be eliminated. 

The preexisting liability will need to be adjusted with respect to the newly recognized right-of-use asset. Because of this, there is a major transition consideration to keep in mind with regards to impairment of leased assets and ROU assets.  

Leased Asset Impairments That Were Previously Unrecorded May Need to Be Recognized 

Assets are only recognized when listed on the balance sheet. Leased assets will have to adopt the same principle. A liability will have to be created with respect to the lease, while a corresponding leased asset will have to be recognized under ASC 360.  

If an organization has any leased assets that weren’t previously recorded in this manner, it will have to be done upon adoption. In some cases, the organization will also have to recognize an impairment of asset that may have occurred before recognition.  

If the carrying value of a long-lived leased asset is less than the impairment calculated, it would mean that the organization has not recognized the entire impairment value. When the transfer is made, the unrecognized portion of impairment should be recorded in such a manner that the ROU asset value exceeds its fair value.  

If there is an offset, it can be recorded as a loss or as equity. In any case, the lease would still be recognized as an operating lease.  

Furthermore, if there are any exit costs associated with the lease, it will be recorded as a lease expense – even if the organization decides to stop using a leased asset (unlike in the old ASC 842 provisions where the remaining fair value would be recorded as a liability under ASC 420). This is because variable payments won’t be considered when measuring the value of an ROU asset.  

Instead of recording it as a negative lease asset, an organization should reduce the carrying about of this asset to zero and either derecognize it or carry the remaining balance forward. 

Remembering all these provisions can prove to be difficult – not to mention the immense recalculation costs involved. If you’d like an easy way to handle your lease accounting needs, we recommend you give iLeasePro a go. Call us today to schedule a free demo! 

Leases (Topic 842) was issued by the Financial Accounting Standards Board (“FASB”) in February 2016 and represented a rather substantial change in how leases are to be accounted for, especially for lessees. More than 30 months have gone by and the effective date to implement the new standard is fast approaching. The effective date for public business entities is for annual periods beginning after December 31, 2018 and for other entities (private companies) for annual periods beginning after December 15, 2019. Since the new revenue recognition standard was issued at about the same time as Topic 842, many companies focused almost all of their attention on revenue recognition and delayed focusing on lease accounting. However, time is running out and there are a number of issues that must be addressed quickly as part of the Topic 842 implementation.

In this article, we will discuss some of the key decisions and more difficult assessments that have to be made by lessees as part of implementing the new standard.

Transition Method

When the FASB originally issued the standard, it set the transition date requirements as the later of: (1) the beginning of the earliest period presented in the financial statements or (2) the commencement date of the lease. In a recently adopted update to the standard, the FASB provided a significant time saving transition option which would allow the transition date to be the date of initial application. As a practical matter, this allows public companies to apply the standard on January 1, 2019 (private companies on January 1,2020) and not have to restate the prior periods presented in the financial statements. Companies that choose this transition option would be required to provide Topic 840 comparative period disclosures.

In a recent survey by KPMG LLP, almost 75% of companies surveyed intend to avail themselves of this alternate transition approach.

Package of Practical Expedients

There is a package of practical expedients provided in Topic 842 as a means of lessening the burden of transition. An entity may elect not to reassess:

• Whether expired or existing contracts contain leases under the new definition of a lease;
• Lease classification for expired or existing leases; and
• Whether previously capitalized initial direct costs would qualify for capitalization under Topic 842.

Note that Topic 842 has curtailed what may be considered an initial direct cost when compared with Topic 840.

This list of practical expedients would have to be adopted on an all or nothing basis for the entire portfolio of leases. And note that errors in the application of Topic 840 are not grandfathered as part of this provision. The overall effect of this transition option will be that existing leases will continue to be recognized in accordance with current US GAAP except that entities will have to (1) recognize a lease liability and right of use asset for operating leases and (2) if the lease is modified, account for the lease under Topic 842 at the date of modification.

In the survey noted above, a vast majority of public companies plan to elect the package of practical expedients, with many private companies still undecided. Almost all private companies are ultimately expected to adopt this option.

Use of Hindsight

Hindsight is allowed when considering the likelihood that an option to extend or terminate the lease will be exercised or a purchase option will be exercised and assessing the impairment of a right of use asset. This transition option can be elected on its own or in combination with the package of practical expedients noted above.

In the KMPG survey, most of the respondents indicated that they were undecided as to whether to elect this option. The main drawback to hindsight is that necessary transition adjustments cannot be finalized prior to the effective date and entities have to evaluate all relevant factors impacting hindsight at the effective date.

Embedded Leases

Embedded leases are a somewhat new concern coming out of adoption of the new standard. Embedded leases are components within contracts that entail the use of a particular asset, where the user has control over that asset. Therefore, they meet the definition of a lease. The language in the contract may not contain the word “lease”. These lease arrangements may not have been previously identified and the portion of the contract that meets the definition of a lease may be a relatively small component of the contract. These types of arrangements may be found in IT services contracts and supply contracts to name a few.

Under Topic 840, these lease arrangements may have been accounted for substantially the same as an operating lease with no material financial statement impact. Topic 842 requires operating leases to be recognized on the balance and thus the importance of identifying these embedded lease arrangements. Consequently, certain contracts may require a fresh look with an evaluation of whether they contain a right to use an identified asset.

Conclusion

If your lease portfolio is relatively small and your lease terms are relatively straight forward, it may not be difficult to conclude upon the aforementioned issues. But for many, transition matters will have to be closely evaluated and matters such as embedded leases will require a fresh evaluation and establishment of processes and procedures going forward. If you have not thought about these matters yet, now is the time to start.

Please contact iLease Management if you are seeking any help complying with this FASB compliance. Please visit: https://ileasepro.com/