Do the new lease accounting standards apply to your company? In almost every case, the short answer to that question will be yes. The long answer involves taking a closer look at your contracts.
But, first, exactly which new leasing standards are we talking about? There are three standard-setting accounting boards: the International Accounting Standards Board (IASB), the Governmental Accounting Standards Board (GASB), and the Financial Accounting Standards Board (FASB). Each develops guidance on financial reporting for specific types of entities.
Which standard you need to comply with depends on what type of organization you are. Entities with leasing activities that fall under more than one board’s jurisdiction, will need to report according to the guidelines set forth by each board concerned.
Determining the appropriate discount rate to use under FASB 842 and IFRS 16 is a little bit like being between a rock and a hard place.
According to the new lease accounting standards, which private companies have until the end of the year to implement in order to be in compliance, lessees need to recognize a lease liability on the balance sheet using either the rate implicit in the lease or their incremental borrowing rate (IBR).
At first glance, this choice appears straightforward enough. But actually this aspect of the new guidance is causing more than just a little confusion and frustration. So much so, that the topic is open for discussion in FASB’s next roundtable meeting scheduled for mid-May. (The meeting was originally slated for early April, but with concerns related to the coronavirus crisis, it was pushed back.)
Before getting into the specifics about what makes this discount rate determination so perplexing, private companies reporting under FASB 842 should be aware that the board offers an alternative in the form of a practical expedient.
Yes, Accountants, there is a place for spreadsheets in your ASC 842 implementation process.
For some, that bit of news is as welcome as Virginia being assured there is a Santa Claus. Especially with all the headlines declaring lease accounting software as the one and only answer to the challenges of implementing the new lease accounting standards. One article flat out claims the days of using Excel are over!
It’s easy to see why spreadsheets are so beloved. They’re inexpensive, versatile and have been around for ages.
But it’s also understandable that many implementers gave up on spreadsheets in favor of an automated solution. In fact, 72% of public companies that have finished implementation either upgraded an existing system or purchased new lease accounting software. Early on, they realized the magnitude, complexity and significance of the task before them.
The new FASB lease accounting guidelines put operating leases front and center.
In preparing for the transition to the new lease accounting standard, most of the focus has been on the changes to the actual accounting for leases. In a nutshell, virtually all leases with terms over 12 months are required to be recognized on the balance sheet with an ROU asset and corresponding lease liability. For private companies, the deadline is January 2021.
But there’s another change within the 400-plus pages of FASB 842 that organizations also need to pay close attention to from the get-go.
And that’s the ASC 842 disclosure requirements under the new lease accounting standard.
Reporting entities should be aware that the new disclosure requirements have expanded significantly over the old guidance for both lessees and lessors. This increase in what’s required means you need to consider all the disclosures early in your implementation process--even before settling upon an automated lease accounting software solution.
Why did FASB increase the disclosure requirements?
In keeping with the overall objective of the new FASB lease accounting rules to bring transparency, insight and clarity to a company’s financial statements, the Board also revised what it expected entities to disclose regarding their leasing commitments.
According to FASB ASC 842, the disclosures should “enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.”
So to satisfy this objective, lessees (lessor disclosures will be discussed at a later date) must disclose information about their leases that’s both qualitative and quantitative as well as explanations about the assumptions used in the process.
In the absence of hard and fast “bright lines,” the new guidance allows a reporting entity to apply judgment when it comes to how much detail to include in its disclosures and how much emphasis each of the various requirements receives.
“A lessee shall aggregate disclosures so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or by aggregating items that have different characteristics.” In other words, lessees should provide information that is neither extremely detailed nor overly high level but simply enough to present a straightforward understanding of its current and future leasing obligations.
Furthermore, the disclosures of companies with extensive leasing activities are expected to be more comprehensive than those of a company with fewer leases.
Before getting into the new disclosures for lessees, you should know that FASB eliminated some of the current disclosures:
- The total of minimum rentals that are to be received on noncancelable subleases in the future. This applies to both operating and capital leases as of the date of the financial statements.
- For each financial statement presented, the gross amount of assets recorded under capital leases by major classes.
- For sale-leaseback transactions when the seller-lessee applied the deposit or financing method, the future minimum lease payments and minimum sublease rentals aggregated at the date of the financial statements and for each of the five succeeding fiscal years.
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.
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.