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AMTdirect Blog

AMTdirect Blog

Haley Martin

Haley is the VP of Marketing at AMTdirect. She is focused on bringing relevant information about lease accounting and administration to accountants and corporate real estate professionals.

Recent Posts

ASC 842 Embedded Leases: How to Identify Them

Posted on 3/16/20 7:00 AM by Haley Martin in Lease Accounting, in Compliance

One of the topics in the new FASB guidelines getting a lot of attention these days involves ASC 842 embedded leases--those provisions that are often hidden or buried in a larger service or supply contract that grant a lessee the right to use an asset for a specified term.

In fact, in a 2018 KPMG poll, over 60% of respondents indicated that the most significant challenge they encountered in ASC 842 implementation was identifying embedded leases.

The requirement to identify embedded leases is not altogether new. Under ASC 840, embedded leases, like operating leases, were to be included only in the footnotes. And because they had little impact on financial statements, many companies may not have been diligent in their efforts to identify all their embedded leases. 

However, the new lease accounting standard calls for virtually all leases over 12 months to be recognized on the balance sheet with a right-to-use lease asset and lease liability. 

It doesn’t matter if an embedded lease is classified as an operating lease or a finance lease, the accounting for it must happen on the balance sheet.

The recognition of embedded leases has financial professionals concerned for several reasons:

  • As noted above, these types of leases were often overlooked as simply part of a service agreement or treated as operating leases--which up till now were accounted for off-balance sheet. There could be a myriad of embedded leases that need to be discovered.
  • Locating them is difficult, partly because many contracts with an embedded lease may not even contain the words “lease” or “rent.”
  • Failure to include an embedded lease could possibly have a material impact on a company’s financial statements. 

Private companies in the midst of implementing the FASB guidelines for compliance, need to take the identification of all their embedded leases seriously.

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New Lease Accounting Rules and Lease Classification

Posted on 3/9/20 7:00 AM by Haley Martin in Lease Accounting, in Compliance

The buzz surrounding the new lease accounting rules generally focuses on operating leases. All those leasing arrangements that were previously buried in the footnotes of a company’s financial statements are now required to be recognized with a lease asset and lease liability on the balance sheet.

No doubt about it. That one change is definitely buzzworthy. After the FASB announced its plans, financial forecasters estimated that singular move could increase balance sheets of U.S. publicly traded companies by as much as $2 trillion and could make many of them appear more leveraged than under the legacy guidance.

But before you can begin the new--and somewhat complicated--accounting for those operating leases, you have to complete the classification of all your leases--including any contracts that may contain an embedded lease.

The FASB’s legacy guidance uses a two-model approach: operating leases and capital leases. FASB ASC 842 also uses a dual model approach: operating leases and capital leases with a new name--finance leases.

Regarding capital leases, the FASB did more than change the name. They made slight changes to the four criteria used to determine whether a lease is a finance lease or not and added a fifth one.

The actual accounting for finance leases under the new lease accounting rules is not much different from the way capital leases were handled under the old standard.

So if the accounting for a finance lease is practically the same as it has been and virtually all leases over 12 months have to be recognized on the balance sheet, should it really matter how your leases are classified? 

Yes. Because the correct accounting of a lease begins with the correct lease classification.

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GASB 87 Examples: Components of the New Lease Accounting Guidance

Posted on 3/2/20 7:00 AM by Haley Martin in Lease Accounting, in GASB, in Compliance

“Just the facts, ma’am.” Sergeant Joe Friday uttered some version of those words in just about every episode of Dragnet. So taking a cue from the iconic detective…

Here’s just the facts about GASB 87.

Overview

The Governmental Accounting Standards Board (GASB) issued Statement No. 87, Leases, in June 2017. Like its counterparts in the non-governmental sector, the governing board’s objective was to improve transparency and comparability in the accounting and financial reporting of leases. 

In a news release GASB Chairman David A. Vaudt explained, “The Board’s new leasing guidance better aligns the accounting and financial reporting of these arrangements with their economic substance.”

The primary way all three boards aimed to achieve this goal was by moving operating leases to the balance sheet. 

Whereas the Financial Accounting Standards Board (FASB) maintained its two-model approach for the classification of leases, the International Accounting Standards Board (IASB) established a single-model approach with IFRS 16, eliminating the operating lease classification. This shift was based on the thinking that all leases are basically financing arrangements for the right to use an underlying asset.

Like IFRS 16, the new lease accounting standard from the GASB uses the single-model approach. This differs from the existing GASB guidance which uses a dual-model approach more closely mirroring FASB 13 (which dates back to 1976 even before the GASB was formed). 

Through the years the GASB has issued concept statements that define terms such as asset, lease and liability and has periodically evaluated their standards to determine if they still worked for governments or if updates were called for.

But GASB 87 presents the biggest change to lease accounting for governmental entities.

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Financial Lease Accounting Software: Alternatives to Excel

Posted on 2/24/20 7:00 AM by Haley Martin in Lease Accounting, in Compliance

Remember when you loved watching cartoons? Then without even knowing when it happened,  you realized they were too simplistic and didn’t meet your entertainment needs. You’d outgrown them.

The same thing can happen with Excel.

When you first started using it for your financial lease accounting, you were so impressed. Thought you couldn’t work without it. But somewhere along the way, errors increased, functionality was lacking. But for whatever reason, you stuck with it.

Excel spreadsheets certainly have their value. The popular software application is versatile, inexpensive and is a convenient file format for downloading or uploading data from other sources.

But there are significant consequences for continuing with Excel when your lease accounting compliance needs have surpassed its capabilities. Especially now with the new lease accounting rules in the mix.

If you have more than 10 leases, including real estate, vehicle, equipment and embedded leases, it’s recommended that you upgrade from Excel or other manual systems to an automated financial lease accounting software solution.

If you’re still on the fence and thinking that Excel will suffice, take a moment to analyze your current situation. If you’re experiencing the following issues, then, at the very least, it’s time to seriously consider more comprehensive options.

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New FASB Standards: 6 Tips for Managing the Transition

Posted on 2/17/20 7:00 AM by Haley Martin in FASB, in Lease Accounting, in Compliance

It’s already halfway through Q1. Time is definitely ticking away.

The number of days left to complete your transition to the new FASB standards is quickly dwindling--although there is that one extra day for Leap Year.

If you haven’t yet begun ASC 842 implementation, the best tip we can give you is to start now.

In fact, it’s so important that it bears repeating. 

The time to begin your transition is now.

Transitioning to the new lease accounting rules is a complex endeavor that can take companies substantially more time and resources than they originally planned for. In a survey of both public and private companies by KPMG, 75% of respondents reported that they were facing challenges with implementation, leaving only 25% who said they were on schedule.

To eliminate some of those challenges and facilitate a smoother, more efficient process from start to finish, we offer these 6 tips.

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GASB 87 Leases vs. FASB 842: How Are They Different?

Posted on 2/10/20 7:00 AM by Haley Martin in FASB, in Lease Accounting, in GASB, in Compliance

It may not be glitzy and glamorous, but like The Great Gatsby, GASB 87 deals with appearances versus reality. 

And so does its nongovernmental counterpart, FASB 842.

In fact, the aim of all the new lease accounting standards is to make a reporting entity’s financial statements more transparent, thereby reflecting a more accurate picture of its financial health. This is true especially with regards to the economic substance of its leases.The new lease accounting guidance from all three boards moves substantially all leases onto the balance sheet. There are other changes, but that shift is the major, monumental one that will impact an entity’s financials the most.

Up till now, both private and public companies as well as governmental entities have been allowed to disclose operating leases only in the footnotes. 

But the problem with not including operating leases on the balance sheet is that an organization can look as though it has far fewer liabilities than it actually does. Appearances vs. reality.

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