10 Common ASC 842 Lease Accounting Mistakes to Avoid

Here are some common mistakes lessees make when dealing with lease accounting according to the ASC 842 standards and how iLeasePro can easily help you avoid making them.

Common ASC 842 Mistakes to Avoid

1. Lease Misclassification

Under ASC 842, leases should be classified as either operating or finance leases. Misclassifying a lease can significantly impact a company's financial statements.

2. Incorrect Lease Term Determination

Some lessees struggle to correctly identify the lease term, which includes non-cancellable periods as well as periods where there's a likelihood to exercise an extension or termination option.

3. Mismanagement of Optional Payments

These payments should be included in the lease liability if the lessee is likely to exercise an option to purchase the leased asset or to extend or terminate the lease.

4. Inaccurate Discount Rate Use

Leases should be discounted using the rate implicit in the lease or the lessee's incremental borrowing rate if the implicit rate isn't readily determined. The use of an inaccurate rate can greatly affect the lease liability and right-of-use asset recorded.

5. Failure to Update Lease Assumptions

The ASC 842 standards require lessees to reassess lease terms and discount rates if there is a significant event or change in circumstances. Failing to update these assumptions can lead to major discrepancies.

6. Overlooking Embedded Leases

An embedded lease exists within a contract that's not presented as a lease but grants use of a specific asset. These often go overlooked but must be accounted for under ASC 842.

7. Ignoring Non-Lease Components

Many leases include both lease (e.g., right to use an asset) and non-lease components (e.g., maintenance services). These components should be separated to avoid overstating lease liabilities and right-of-use assets.

8. Incomplete Record Keeping

Accurate and complete record-keeping is essential as leases must be tracked over their entire lifecycle, from initiation to any modifications and through to termination.

9. Mistakes in Lease Modification Accounting

Lease modifications may result in a separate lease, distinct from the original lease. Incorrectly accounting for these modifications can result in inaccuracies.

10. Non-compliance with Disclosure Requirements

ASC 842 requires detailed qualitative and quantitative disclosures. Many lessees fail to fully comply with these disclosure requirements, which can lead to non-compliance issues.

How iLeasePro Helps You Avoid These Mistakes

iLeasePro is a lease management and accounting solution that can help mitigate common mistakes made by lessees in lease accounting under the ASC 842 standards. Here's how:

1. Lease Misclassification

iLeasePro provides a lease classification test that can assist in determining if a lease should be categorized as an operating or finance lease, which aids in avoiding misclassifications.

2. Incorrect Lease Term Determination

iLeasePro allows you to easily capture all terms of the lease, including options for extensions or early termination. This ensures the lease term is determined accurately.

3. Mismanagement of Optional Payments

The software allows you to capture and track optional payments related to leases, such as the cost of asset purchase options or extension/termination options. This helps ensure these are correctly included in the lease liability calculation.

4. Inaccurate Discount Rate Use

iLeasePro lets you store and utilize the incremental borrowing rate or implicit rate for each lease. This ensures accurate calculation of lease liability and the right-of-use asset.

5. Failure to Update Lease Assumptions

iLeasePro provides alerts and reminders to reassess lease terms and discount rates whenever there is a significant event or change in circumstances. This ensures you're always working with the most current assumptions.

6. Overlooking Embedded Leases

The software enables you to capture all lease data, even for contracts not initially recognized as leases. This feature helps ensure all embedded leases are properly tracked and accounted for.

7. Ignoring Non-Lease Components

iLeasePro lets you separate and accurately account for both lease and non-lease components. This allows for the appropriate recognition of lease liabilities and right-of-use assets.

8. Incomplete Record Keeping

With iLeasePro, you can maintain complete and accurate records of all lease data from initiation to modification to termination. This avoids incomplete record keeping.

9. Mistakes in Lease Modification Accounting

The system can track and account for lease modifications, ensuring changes are correctly recorded and that new leases are separated from original leases when required.

10. Non-compliance with Disclosure Requirements

iLeasePro has built-in reporting features that support the extensive qualitative and quantitative disclosures required by ASC 842. This aids in maintaining compliance with disclosure requirements.

Conclusion

By leveraging iLeasePro, lessees can better understand ASC 842, keep track of their lease obligations, and significantly reduce the chance of making mistakes in lease accounting.

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