ASC 842: What and Why is it important?
ASC 842 is the new lease accounting standard published by the Financial Accounting Standards Board (FASB), which public companies were required to adopt in 2019 and private companies are required to adopt in 2020. ASC 842 requires the tracking and disclosure of all a company's leased assets and replaces the previous US GAAP lease standard, ASC 840.
For many, fully understanding ASC 842 has been the source of immediate frustration. How can organizations gain leasing compliance if they are unclear on the implications of what the accounting standards mean?
How ASC 842 Came to Be
ASC 842 came into existence as a result of the Enron fallout. At its height, Enron was a much riskier company than its published financial statements indicated in 2001. This was mostly due to its significant use of leases, which under the old leasing disclosure regulations -- FAS 13 / ASC 840 -- only required capital leases on the balance sheet.
Infamously, Enron fell on hard times, entering Chapter 11 bankruptcy in 2001, exiting said bankruptcy in 2004, all before selling its last asset in 2006. Along the way, shareholders lost over $11 billion, and the Sarbanes-Oxley Act of 2002 came into existence in an attempt to improve public firm disclosures and hold executives accountable. Enron's accounting firm Arthur Anderson was dissolved, and the SEC tasked the FASB to improve lease disclosures overall.
What Is ASC 842?
Lease accounting -- guided initially by FAS 13 and subsequently by ASC 840 -- required leases that met certain financial thresholds to be represented on the balance sheet. It was those latest ASC 840 regulations, in the early 2000s, that were identified as needing to change.
FASB took up the challenge of creating a follow-up to ASC 840. However, it took the better part of a decade, two Exposure Drafts and several disagreements with their international counterparts at the International Accounting Standards Board (IASB) for the FASB to ultimately adopt ASC 842 via ASU 2016-02 on February 25, 2016.
The new lease accounting standards, FASB's ASC 842 and its international equivalent IASB's IFRS 16 both require non-governmental entities and certain not-for-profit organizations to include both lessee and lessor lease obligations of both real estate and equipment assets in their financial statements, regardless of whether the lease is classified as an operating or financing lease. The new lease accounting rules provide better transparency of the monetary value or economic benefits, as well as the timing and uncertainty of the cash flows from or due to leases.
For US public and all international companies, the deadline to comply with ASC 842 and IFRS 16 began for fiscal years beginning after December 15, 2018 for US public companies and January 1, 2019 for all international companies.
US private companies had until December 15, 2019 to comply with ASC 842, but received a reprieve in July of 2019 allowing a year-long extension and a new adoption date for fiscal years beginning after December 15, 2020.
What Does ASC 842 Mean for You?
ASC 842 requires organizations with lease assets to recognize nearly all leases as assets and liabilities, whether classified as operating leases or financing leases, subject to certain exemptions. For the lessee or lessor, the recognition of more ASC 842 governed lease-related assets s liabilities, as well as changes to the timing of lease expense recognition, has had significant financial reporting and business implications.
With the new ASC 842 and IFRS 16 accounting standards, compliance is more complicated and demands a higher level of internal effort. Whether it is finding leases, creating new workflows to manage them or understanding the new monthly closing process around them, ASC 842 and IFRS 16 require more work.
How Can Lucernex Help?
Designed to meet the needs of both real estate and equipment leases, Accruent's Lucernex Lease Administration and Accounting solution allows users to mitigate risk, improve business processes and make better financial decisions for their business. Lucernex enables you to:
- Meet the new financial reporting requirements under ASC 842 & IFRS 16.
- Accurately classify your leases as operating leases or finance leases using the ASC 842 test.
- Generate accurate accounting schedules that have been certified by an independent 3rd party accounting firm.
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