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.
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.
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, thus ensuring 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, helping 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, ensuring 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, thus avoiding 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.
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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