It’s important to know what ASC 842 is and how it works, so let’s review. What follows is a rundown on what you need to know about ASC 842 and ASC 842 software, from some of the basic concepts behind it to some information about some of the biggest and most complex changes behind this standard.
What is ASC 842?
ASC 842, which stands for Accounting Standards Codification, is a standard for lease accounting that was implemented by the Financial Accounting Standards Board (FASB) that’s designed to foster and enhance transparency between companies and investors when it comes to their lease accounting.
It incorporates a number of important Generally Accepted Accounting Principles (GAAP), and at the simplest level ASC 842 mandates that all leases longer than 12 months must be recorded as assets and liabilities on a balance sheet.
How ASC 842 Works
So what does that definition actually mean?
To explain the implications of ASC 842, it’s important to understand that it’s a replacement for a prior GAAP lease accounting standard, ASC 840.
From ASC 840 to ASC 842. Under the terms and specifications of ASC 840, certain leases could be classified as “operating leases,” and that classification meant that they didn’t have to be capitalized on a company’s balance sheet.
The problem with doing that is that these operating leases were excluded from many financial analysis rations, with return on assets being one example.
The FASB felt that these exclusions could give investors an inaccurate depiction of a company’s financial performance, so they replaced ASC 840 with ASC 842 to promote greater transparency.
The New Requirements for ASC 842
While this might seem to be a simple enough change to implement, it has a profound impact on the balance sheets of many companies.
Let’s take the example of a company that only has a single lease, and let’s assume it’s for real estate. That means it has a significant value, so having to put it on a balance sheet can completely alter many of the important numbers on that sheet.
Moreover, many companies have multiple leases that encompass a variety of assets, including the following:
- Heavy equipment
- Computers and telephones
- Warehouse space
In addition, leases can be embedded in service companies for all of these items, and for other assets as well.
Under ASC 842, they all have to be recategorized so they can be added to a balance sheet, and this can be especially difficult for companies with decentralized operation that includes national and international offices.
What Software Solutions and Management Software Do You Need for ASC 842?
One of the most basic software requirements for ASC 842 is to have a package that will handle the financial calculations required by the new standard.
Under ASC 840, accounting procedures for operating leases was easier because lease payments were categorized as expenses on a straight-line basis.
Now, under ASC 842, the present value of these payments that are committed for the future have to go on a company’s balance sheet as a lease liability, with that liability offset by a right-to-use asset.
ASC 842 can also affect changes in a lease. Let’s take several possible examples of how this might work:
- Tenants who add square footage to the space they’re renting.
- Lease vehicles that are accidentally damaged during use.
- Leased equipment that is returned early.
The accounting procedures for all of these changes may have to be accounted for differently under ASC 842.
It might consider them a modification, a re-measurement or an outright revision, and all of these changes need to have different inputs for the lease calculation to be properly updated.
While all of this can be very confusing, leasing software designed for ASC 842 can make the required calculations automatically, then help you understand them with an effective data reporting process.
How ASC 842 Applies to Real Estate
As you can see from the prior examples, the impact of ASC 842 on real estate leases can be huge.
This is especially true if elements like rent payments change and square footage is added or subtracted. Changes in property values must also be accounted for differently under ASC 842, and the software has to be able to handle all these changes.
Accounting for ASC 842 in Your Lease Management Software
As you might expect, the accounting changes required under ASC 842 can have a profound impact on lease management software and how you use it.
To start, it’s important to note that the software itself isn’t considered an asset, so there are no changes in the accounting procedures under ASC 842.
But lease software management has to do a lot more to help you keep up with the changes. It has to be able to track lease expiration dates and calculate the amounts associated with those dates, and it also has to have an AI function to analyze current parameters and predict future performance.
Finally, the software has to provide automatic alerts for those dates and deadlines, and all of these ASC 842 changes must be incorporated in the reports generated by your lease management software.
How Does ASC 842 Affect Your Lease Strategy?
While this question is obviously somewhat subjective based on the nature of your business, it starts by understanding how the ASC 842 changes affect your balance sheet.
That can affect your entire lease portfolio, how you approach real estate and equipment leases, and what exactly you want your balance sheet to show when potential investors see it.
Get the Best ASC 842 Software Solution from iLeasePro
At iLeasePro, we’ve been helping companies understand and implement ASC 842 since it replaced ASC 840 in December of 2021. We know standard inside out, and we know how to implement software solutions that will help you be in compliance.
We’ve done this for both small and large businesses, and we’ve also helped these companies use ASC 842 as a business tool to operate more efficiently, get better reporting and use their leases as assets. When you call us we can set you up with a lease accounting software free demo so you can see how it all works.
To do this, call us at 888-351-4606, or you can email us at firstname.lastname@example.org We also have plenty of great information about lease accounting software on our website, which is ileasepro.com, and you can chat with a live representative there as well.