You may have heard about ASC 842 Accounting for Operating Leases. Perhaps it’s something you think you don’t need to deal with now because the requirement deadline is off in the future and taking care of it seems costly. Or, you might even be tempted to avoid lease accounting all together and have your CPA include a modification to their report on your financials, but that’s not a good idea. Here’s why:
- The new requirements for leases will not go away;
- The report modification will indicate that there is a GAAP departure in the statements;
- Lenders or stakeholders may require the lease assets and related liability to be presented on the balance sheet.
And while this feels like yet another requirement facing you while you and your business are dealing with uncertainty and other burdens, we recommend you start preparing now so it doesn’t become the ‘elephant in the room’ on January 1, 2022.
What is the Big Change in Accounting for Operating Leases?
ASC 842 requires that private companies track and disclose their leased assets. Much is the same for finance leases (formerly referred to as capital leases). If the lease is not a finance lease, then it is an operating lease. But this is where you want to hold on to your seat! An operating lease will now be recorded as a Right-of-Use asset (“ROU”), with a corresponding Lease Liability for the present value of the future minimum lease payments. If you lease your building, this will probably be a big liability on the balance sheet. If the operating lease is for 12 months or less, or if month-to-month, then continue to expense the payments as you have always done.
How to Start Preparing:
- Begin gathering the data for your existing leases now.
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- Look over your Accounts Payable register for the past two or three months for any recurring monthly payments. If you don’t recognize what the payment is for, do some additional digging but pulling up the invoice to see what the payment is for and to confirm it is for some type of lease.
- Look through files for contracts or leases you have entered.
- Note what the monthly payment is for, if the payment increases (or decreases) over future months, what the payment terms are, when the lease starts and ends, when you move into the lease (commencement date), any upfront costs.
- Utilize your existing systems. Chances are you already have resources at your disposal that can be used to find, record, track, report and manage your leases according to the latest standards.
- Start compiling that data into one place. If you only have a few leases, then using Excel could provide you the accounting numbers for your financial records. However, if you have many leases, that could become difficult to manage. Regardless, you don’t want to have this info in multiple places so try to have it centralized, if possible.
- If you have numerous leases, being methodical is key. Planning, training, and project management are essential to getting a complicated process completed with multiple team members and strict deadlines.
- Consider a specialized software solution to wrangle this process. To make your team’s life easier, take a color-by-numbers approach by using the resources, content and prompts that are built-in in a specialized software.
- Consider seeking help from a CPA firm with specialized knowledge to help implement and manage your lease accounting. If you don’t have the time, team and resources to manage the process yourself, outsourced accounting may make sense. CPAs with experience in lease reporting requirements can manage, calculate, and update your leases on a routine basis, and provide monthly journal entries.
- Look towards the future of maintaining this process and these records. Make decisions on professional assistance and software solutions for accounting for operating leases.
- Record your process. Things happen! People and offices move, laws and methods change. Be sure to record your process while you are doing it so that next time it needs to be done, your team will have the steps laid out for them.
Finding financial and operating leases hidden within contracts in your company’s files takes time, but it is crucial to get started now. If you need help evaluating your situation and managing your lease accounting process, LSL can help. Contact us to schedule a call.
