This guide provides an overview of the new lease accounting standards, covering aspects such as implementation, practical tips, and compliance requirements. It is an essential resource for accounting professionals seeking to understand and apply these new regulations in their practices.
The market for lease administration software is experiencing remarkable growth and is projected to surpass $7 billion by the year 2030. Contributing to this uptrend are the major revisions in lease accounting standards in recent years.
The new lease accounting standards aim to make financial statements clearer and more uniform. This shift is a deliberate move towards greater transparency in financial reporting.
Lease administrators, CFOs, and accountants must adapt to these changes. It is important to remain compliant with rules and regulations while maintaining a competitive edge.
The revision of lease accounting standards has set a new precedent in financial reporting. These changes, aimed to bolster transparency and enable more accurate comparisons between organizations, have substantial implications. Let us delve into the specifics of each of these standards.
ASC 842 replaced ASC 840 and has reshaped how leases are classified and reported on balance sheets. Under ASC 842, leases are categorized as either operating or finance leases, a change from the previous capital lease accounting designation under ASC 840. Lessees now must record both types of leases on their balance sheets, which reflects the present value of lease payments as a lease liability.
This liability is further adjusted for prepaid rent, initial direct costs, and incentives to calculate the right-of-use asset’s value. While the new standard means changes for lessees, there are also considerations to ASC 842 lease accounting.
Effective Dates: For public companies, the fiscal years starting after December 15, 2018. For private companies and non-profit organizations, the reporting periods after December 15, 2021
IFRS 16, implemented by the International Accounting Standards Board (IASB), changes the accounting treatment for leases exceeding 12 months. It eliminates the traditional classification of leases as either capital or operating. Instead, IFRS 16 introduces a unified “right-of-use” (ROU) model. That means both lessees and lessors must report leases directly on the balance sheet. This shift towards a single-lease accounting model provides a clearer view of an organization’s leasing activities and enhances the transparency and accuracy of financial reporting
Effective Date: January 1, 2019
GASB 87, established by the Governmental Accounting Standards Board, mandates that entities adhering to GASB standards must recognize all leases with terms over 12 months as liabilities and ROU assets. This is for entities such as local governments, public schools, and airports. The standard, like IFRS 16 principles, aims to simplify lease accounting by treating all leases as “financings” rather than operating and capital leases. This approach streamlines the financial reporting process. It increases transparency and consistency across public sector financial statements.
Effective Date: June 15, 2021
GASB 96 introduces guidelines for Subscription-Based Information Technology Arrangements (SBITAs). Unlike lease agreements that involve lessees and lessors, SBITAs are contracts between governmental organizations and IT service providers. Like other reforms, GASB 96 uses right-of-use assets. It is a contract outlining a government’s right to use IT assets for a set period.
Effective Date: June 15, 2022
The implementation of the new lease accounting standards marks a significant turning point for businesses. It affects both financial reporting and operations. Understanding what this means in practice is crucial for organizations aiming to leverage the benefits.
Adopting new lease accounting standards introduces a comprehensive balance sheet recognition of lease liabilities and assets. It fundamentally alters how organizations report their financial standing. This shift ensures that all lease obligations are transparent and affects key financial metrics such as debt-to-equity and return on assets.
Further, changes in the income statement presentation for lease expenses could impact profit and loss statements. These changes mean organizations must recalibrate financial analysis and decision-making to accommodate the updated reporting framework.
The transition to the new lease accounting standards requires significant adjustments to accounting systems and processes. Organizations must undertake training and education initiatives to ensure their staff comprehends and accurately applies the updated standards. This learning curve presents some challenges but also opens the door to opportunities for lease portfolio optimization and cost savings.
By reassessing lease agreements and the utilization of leased assets, businesses discover efficiencies and potentially reduce lease-related expenses. Implementing these standards, therefore, aligns with compliance objectives while sparking strategic decisions and operational improvement.
Staying compliant and competitive requires a proactive approach, focusing on policy updates, technology adoption, and strategic planning.
To maintain compliance with the evolving lease accounting standards, organizations should:
To safeguard against future uncertainties while improving operations, businesses should:
Adopting specialized real estate management software, such as Accruent Lx Contracts, is a proactive way to navigate the new standards. This software offers:
These strategies give organizations the ability to comply with the new lease accounting standards and position themselves as industry leaders.
Accruent Lx Contracts offers an innovative lease accounting software solution for businesses navigating new lease accounting standards. It delivers precision and efficiency through a suite of robust features.
The software automates lease calculations, streamlines data entry, and centralizes document storage. This ensures accuracy, reduces errors, and provides quick access to essential documents. It simplifies lease management from top to bottom.
Accruent Lx Contract is engineered to directly address the challenge of compliance with new standards. The software supports all necessary reporting and disclosures – aligning with standards like ASC 842 and IFRS 16. It makes sure businesses stay up to date so they can act with confidence and clarity.
The software fits into existing financial ecosystems with ease and can scale to meet growing business needs. That means a unified approach to lease accounting. Its adaptable nature ensures that as a lease portfolio expands, the lease accounting processes remain smooth and efficient.
Designed for ease, the software utilizes an intuitive interface that simplifies the user experience. Users quickly pick up best practices and onboarding is simple. Accruent offers comprehensive support and training, ensuring users can maximize the benefits and handle any potential challenges.
Adapting to the new lease accounting standards is essential for transparency and compliance. There are significant impacts on financial reporting and operations, so businesses must consider starting the implementation process now to stay ahead. Learn more about Lx Contracts and schedule a demo today.
