Last Updated on January 10, 2023 by Morgan Beard
We built our ASC 842 survival kit to help you kick start your lease accounting compliance journey. Public companies have already transitioned, but private and nonprofit organizations will need to implement ASC 842 for reporting periods beginning after December 22, 2021.
The change from ASC 840 to ASC 842 is driving accounting teams to search for all leases, including embedded leases, in order to bring complete lease liability transparency to their organizations balance sheet.
This blog will dive into our top tips for surviving ASC 842 compliance as well as link to our survival kit. In the kit you’ll find everything your accounting team needs to learn about the ASC 842 standard, how to calculate your ROU assets and lease liabilities in order to build your journal entries as well as prepare to pass your audit.
What is ASC 842?
First and foremost, what is ASC 842? Well, we are glad you asked. The Financial Standards Accounting Board made the Accounting Standards Codification 842, aka ASC 842, effective in 2019 for public entities. For private companies, COVID pushed the board to delay the transition date back. The time has officially come to make your lease accounting transition.
The purpose of ASC 842 is to bring operating leases onto the balance sheet. It is estimated this new accounting standard brings $3 Trillion onto balance sheets across the county. Not only do accountants need to learn the ins and outs of a new standard. But, they’ll need to search for contracts that may contain an embedded lease.
Top 5 Tips to ASC 842 Survival
While ASC 842 may seem daunting. We built our ASC 842 survival kit with the goal of easing the transition woes for commercial tenants. Ultimately, surviving your lease accounting transition is about learning the new standard, building a game plan, organizing your implementation team, and getting to work. Of course, that was an over-simplification, but you get the idea. Click the link below for all the supporting materials you’ll need to kickstart your ASC 842 transition:
- FASB’s ASC 842 Implementation Checklist
- ASC 842 Glossary of Terms
- Beginners Guide to ASC 842
- Lease Classification Test – Excel Template
- Lease Amortization Schedule – Excel Template
ASC 842 Survival Kit
Download the resources your need to kickstart your ASC 842 compliance journey.
1: Find all your leases.
Under ASC 842, operating leases now have to be on your balance sheet. So, inspecting all contracts and looking for embedded leases within contracts is your first step. Just because a contract does not say “lease” does not mean it is not a lease!
2: Develop lease accounting policies.
Developing lease accounting policies early in your lease accounting compliance process helps direct what information you focus on when reviewing your portfolio of leases.
3: Abstract & organize all of your leases.
Organize all relevant leasing information to ensure anyone who needs the information can access it on demand. Stakeholders like your auditor, controller, or real estate team will need access to critical lease data: like financials, reports, and clauses.
4: Build sustainable processes.
Create a cross-department implementation team to support the lease accounting transition. The lease accounting standard increases a lessee’s administrative burden due to the required increase in process controls; data collection, analysis, and maintenance; monitoring; internal reporting systems; and, most importantly, audit scrutiny.
5: Leverage a tenant-focused leasing software.
We recommend software to any tenant with 10 or more leases. ASC 842 increases the burden on accounting and real estate teams. So, your lease software should power the entire lease life cycle — from signing a new lease agreement, to managing critical dates and complying with the new lease accounting standards.”
Surviving your Audit Under ASC 842
For many organization’s, their audit marks the time in which they are retroactively looking at their leases and actively working toward ASC 842 compliance. Preparing for your audit under ASC 842 is a heavy lift and requires a combination of both strategic and tactical prowess.
Keeping an open line of communication with your auditors is a solid practice year-round. This is especially true before and during your ASC 842 audit. Bring both your internal and external auditors in the loop with your lease accounting compliance decisions and roadmap.
This will help auditors gauge how you have implemented the changes and how you are maintaining them in the future. This is where your policies and internal controls will be examined. It’s safe to assume that auditors will want clarity on the nuances of your accounting assumptions and decisions.
In addition, it will be imperative that you test and assess your techstack and operating systems. For instance, your general ledger may need new accounts to accurately reflect the updated lease accounting standards. Testing your month-end close processes early on will also allow your team to investigate for any inaccuracies, gaps, or errors. Moreover, inviting your auditors to your lease accounting software will give them a proverbial look under the hood of your ASC 842 procedures.
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Ultimately, ASC 842 creates a seismic shift in legacy lease accounting practices. The old tried and true Excel spreadsheet and formulas are falling short in powering CPA Firms and Internal Accounting Teams implementation transition.
Our ASC 842 survival kit is meant to help you start thinking and implementing ASC 842 for your organization. That being said, many private, public, and nonprofit organizations are adopting specialized cloud-based accounting solutions to ease the transition to ASC 842. Why? Well, because software saves your team time, and money all while guaranteeing on-going compliance and accurate journal entries.
When evaluating such a software ensure that it powers the entire lease life cycle from site selection, to critical date management and lease accounting compliance. That way you, your real estate team, operations team, and finance & accounting team are all working from a single source of leasing truth. And, guaranteeing on-going compliance and accurate journal entries.