The new standard for lease accounting from the Financial Accounting Standard Board (FASB), ASC 842, has been in place for about six months now, taking effect for fiscal years beginning after Dec. 15, 2021.
Companies that have been dragging their feet on compliance will want to hop on the bandwagon ASAP – especially since more changes could be coming soon.
New lease accounting standard
Under ASC 842, all of a company’s leases must now be accounted for on the balance sheet. The change was designed to “increase transparency and comparability among organizations” by disclosing key financial info about leases and related transactions.
Since the FASB implemented the standard, it’s created an additional administrative burden for Finance departments in terms of tracking details about leases. To make sure all your leases are accounted for during the transition, experts at accounting firm Friedman LLP recommend that you:
- Identify all your company’s leases (including those for equipment and real estate)
- Summarize all important lease terms
- Calculate and review initial and subsequent accounting for each lease, and
- Summarize any info that’s needed for footnote disclosures.
If the leases are material leases, it’s key to separate any related party operating leases from third-party leases on your balance sheet.
It’s critical to get information on your leases from departments across your company – and not just those involved directly with finance. Along with A/P, who has information about your supply chain and what sorts of equipment you may be leasing, it’s key to speak with IT and your legal department to ensure nothing’s fallen through the cracks that’ll need to be disclosed later.
Also, when disclosing info about your leases on your financial statements, you must now include details about any leases that are planned, but not yet in effect; elections related to your short-term leases; gains and losses related to leases; and discounts and remaining terms.
Importance of lease accounting software
While a spreadsheet may be an adequate method of sorting this info for companies with very few leases, companies with multiple locations and leases will likely want to invest in lease management software. Lease management solutions can simplify lease accounting by helping you track all leases and related info together in one place.
Plus, tools in the software ensure you’re compliant with ASC 842 with less effort on your part. These tools automatically generate the reports and disclosures necessary to meet the guidelines of the standard.
By automating your lease accounting process, you can cut down on reporting errors that occur due to manual data entry, and it can help make the transition smoother for everyone in Finance.
Dealing with financial challenges
Lease management software can help with other challenges related to lease accounting, as well – particularly those that impact your bottom line.
Shortly before the FASB implemented ASC 842, senior accounting and finance professionals were asked about their biggest issues with their lease accounting process. And almost 80% of respondents said they’ve experienced negative impacts due to problems with their lease controls.
Some of the most common issues they’ve encountered are:
- An inability to respond to changes brought on by the pandemic (34%)
- Missed options to extend a due date/deadline (28%)
- Miscalculating the costs of their leases (28%), and
- Forgetting to update unfavorable/unwanted lease terms (28%).
Not only can lease management software help Finance pros with these problems, but it can also help you be more cost effective with managing your leases overall. Having all the data you need on invoices in one spot allows you to easily evaluate lease terms and options, displaying any opportunities you might have to save money.
Saving money is essential in the current economic climate. In fact, 61% of senior Finance pros surveyed said they fell behind on rent during the pandemic – and 37% of them are still behind today. With costs of everything rising, it’s becoming harder to catch up on past-due payments.
Even with these financial difficulties, only 10% of Finance pros surveyed use Excel for lease accounting. Many have invested in solutions for lease management that can help them better visualize and manage the costs associated with their leases to regain some financial ground in this uncertain economy.
Changes to leases for government entities
Solutions to manage lease accounting may become even more essential for certain entities if the Federal Accounting Standards Advisory Board (FASAB) has its way.
The FASAB, which controls lease accounting standards for federal government agencies, has just proposed new amendments to its Statement of Federal Financial Accounting Standards (SFFAS) designed to clarify existing guidance about leases.
The amendments would give additional insight into the FASAB’s original intent for discounting lease liabilities and receivables so the board can apply its lease-related requirements more consistently and accurately. Proposed amendments would also offer clarity on intragovernmental sale-leasebacks and any applicable disclosure requirements.
While clearer guidelines are helpful, software may be necessary to ensure the new guidelines are being followed correctly. Affected stakeholders can comment on these changes until July 8, 2022.
