iLeasePro: Guide to FASB ASC 842 Lease Accounting Software

When it comes to lease accounting software, some of the terminology pertaining to different standards can seem like a word salad that’s loaded with too many acronyms. It’s easy to get dizzy if you’re new to dealing with acronyms like GAAP, FASB, IASB, ASC 840, ASC 842, and so on.

So let’s do some clarification. What follows is a breakdown of FASB lease accounting software—what it is, how it works, and what you need to do and have in your software to make sure you stay in compliance with all the different standards that regulate leasing.

What is FASB Lease Accounting Software?

FASB Lease Accounting Software is an essential tool designed to facilitate compliance with the stringent lease accounting standards set forth by the Financial Accounting Standards Board (FASB). This software is tailored to meet the needs of a wide range of entities within the United States, encompassing public companies, private enterprises, and nonprofit organizations. The primary objective is to ensure that all lease obligations, including types like; real estate, equipment, vehicles, etc, are accurately reflected on the balance sheets, enhancing financial transparency and providing a true representation of an entity's financial position.

The complexity inherent in lease accounting, characterized by the diversity of lease agreements and their respective terms, necessitates a sophisticated solution. FASB Lease Accounting Software automates the intricate process of calculating lease liabilities and right-of-use assets, facilitating timely and accurate financial reporting. It streamlines the management of lease renewals, modifications, and terminations, thereby mitigating the risk of compliance issues.

Moreover, the software supports robust audit trails and comprehensive disclosures, empowering organizations to maintain rigorous compliance standards and efficiently prepare for external audits. By leveraging this advanced tool, accounting professionals can navigate the complexities of lease accounting with confidence, ensuring adherence to current standards and regulations. The adoption of FASB Lease Accounting Software is a prudent step towards safeguarding the integrity of financial reporting and sustaining the trust of stakeholders.

Comparing the FASB ASC 842 vs Other Accounting Standards

Comparative Analysis with IFRS 16

It's pertinent to elucidate the nuances between ASC 842 and IFRS 16, two cornerstone frameworks that govern lease accounting on a global scale. While both standards aim to enhance transparency by mandating the recognition of lease obligations on the balance sheet, they diverge significantly in their execution.

A fundamental distinction lies in the treatment of leases by lessees. IFRS 16 adopts a singular approach, eliminating the traditional bifurcation into operating and finance leases seen in prior standards. This means, under IFRS 16, lessees account for all leases in a manner akin to finance leases under ASC 842, simplifying the accounting process but also broadening the scope of what must be recognized on the balance sheet.

Conversely, ASC 842 retains this bifurcation, presenting a dual model that continues to differentiate between finance leases, which are akin to purchase agreements, and operating leases, which are treated as rental agreements. This distinction under ASC 842 necessitates varied accounting treatments for finance and operating leases, reflecting a more nuanced approach to lease accounting.

This divergence between ASC 842 and IFRS 16 not only underscores the philosophical differences in approaching lease accounting but also has practical implications for entities that operate under both standards. Understanding these distinctions is crucial for accurate financial reporting and compliance in the global accounting landscape.

Comparative Analysis with GASB 87

When addressing the lease accounting requirements for your organization, it's crucial to distinguish between GASB 87 and ASC 842, especially if your entity operates within the governmental sector. GASB 87 is tailored specifically for state and local government entities, crafted by the Governmental Accounting Standards Board (GASB) to guide their lease accounting practices. On the other hand, ASC 842, developed by the Financial Accounting Standards Board (FASB), is applicable to a broader spectrum of entities, including public, private, and not-for-profit organizations, but explicitly excludes governmental entities.

The choice between GASB 87 and ASC 842 is fundamentally determined by the regulatory jurisdiction and environment in which an entity operates. This delineation ensures that the unique operational and financial reporting needs of different types of organizations are adequately addressed, allowing for more accurate and transparent accounting practices. Therefore, understanding whether your entity is governed by GASB or FASB standards is a critical first step in aligning with the appropriate lease accounting requirements.

Lease Accounting Solution To Shift from the FASB ASC 840 to the ASC 842

Transitioning from ASC 840 to ASC 842 represents a significant shift in lease accounting practices, requiring a sophisticated lease accounting solution that can navigate the complexities of the new standard. A professional and trustworthy lease accounting solution designed for this transition must offer comprehensive functionality to ensure full compliance with ASC 842. Such a solution should provide robust capabilities for the recognition, measurement, presentation, and disclosure of leases, addressing the primary differences between the two standards.

Key features should include enhanced data management to capture the extensive lease and non-lease components required by ASC 842, sophisticated calculation engines to handle the revised lease classification criteria and subsequent measurement updates, and detailed reporting functionalities to meet the new disclosure requirements. The ability to manage both the right-of-use asset and lease liability calculations, while also facilitating a dual reporting mechanism for organizations transitioning over different reporting periods, is essential.

Moreover, a solution must offer audit trail capabilities, ensuring that all changes and adjustments are meticulously recorded, supporting transparency and accountability in financial reporting. Integrations with existing financial systems are crucial to streamline the transition process, allowing for seamless data flow and minimizing the risk of errors. In essence, a lease accounting solution for transitioning from ASC 840 to ASC 842 needs to be not only robust and comprehensive but also adaptable, ensuring organizations can achieve and maintain compliance with confidence and efficiency.

FASB Lease Accounting Software and ASC 842

One of the most critical functions of any lease accounting software packages is to stay in compliance with ASC 842.

This standard replaced ASC 840 in December of 2021, and it changed some of the terminology pertaining to leases in a way that affects a company’s balance sheet.

It’s important for FASB leases accounting software to remain compliant with ASC 842 win both calculations and leasing terminology.

How ASC 842 Software Works for Lease Management

ASC Lease Modifications. ASC 842 distinguishes between two different types of modifications. The first modification is any change that gives the lessee additional rights that weren’t covered in the original lease. This includes changes in the term of the lease, or a change that only pertains to a single consideration in the original contract.

The second is any change that terminates a lease either partially or fully by reducing the rights of the lessee to use one of more of the underlying assets specified in the original lease.

Evaluating ASC 842 Lease Modifications

There are two questions to ask when you’re evaluating any modifications in your leases to stay in compliance with ASC 842:

Does the modified contract still contain the basic tenets of the original lease?
If it does, should that contract be considered a new lease or just a significant change to the original lease?

These questions are important because a modification can change the scope or the terms of the original lease so much that it effectively creates a new lease.

It’s important to have lease accounting software that can make this differentiation so that your leases don’t accidentally end up out of compliance.

Practical Expedients

It's important to understand the concept of practical expedients, which are specific provisions allowed by the ASC 842 standard that simplify the adoption and ongoing application of the leasing standard for entities. Practical expedients are designed to reduce the effort and cost of compliance without significantly affecting the quality of financial reporting. Here are some of the key practical expedients under ASC 842:

Package of Practical Expedients: Entities may elect, as a package and not separately, to:
- Not reassess whether any expired or existing contracts are or contain leases.
- Not reassess the lease classification for any expired or existing leases.
- Not reassess initial direct costs for any existing leases.
This package is applied to leases that commenced before the adoption of ASC 842, aiming to ease the transition by allowing entities to carry forward the historical lease determination, classification, and initial direct costs.
The second is that the lease payments for that additional right-of-use remain consistent with the standalone price for that add-on, including any unique conditions that become part of the contract as a result.
Hindsight Practical Expedient: This allows entities to use hindsight when determining lease term and assessing impairment of right-of-use assets. It can be beneficial when evaluating options to extend or terminate leases and assessing the likelihood that an option will be exercised.
Short-Term Lease Expedient: Entities may elect not to apply the lease recognition requirements to short-term leases (leases with a term of 12 months or less that do not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise). Instead, lease payments for these leases are recognized on a straight-line basis over the lease term.
Combination of Lease and Non-Lease Components: Lessees can elect to combine lease and non-lease components (e.g., combining the lease of an asset with maintenance services) and account for them as a single lease component, simplifying the accounting process.
Use of a Portfolio Approach: Entities may apply a portfolio approach to lease contracts if they reasonably expect that the effects on the financial statements will not materially differ from applying ASC 842 to the individual leases within that portfolio.

These practical expedients are designed to provide flexibility and ease the administrative burden of adopting and applying the new leasing standard, especially where the gathering of all historical lease data would be exceedingly difficult, time-consuming, or costly. Entities must disclose the expedients they have elected to apply in their financial statements, providing transparency to users of the financial statements about the accounting policies adopted.

What Conditions Create a New Lease Under ASC 842?

Two conditions are necessary for this to happen.

The first is that a modification grants the lessee an additional right-of-use (ROU) access that wasn’t in the original lease (e.g., additional floor space in a leased building).
The second is that the lease payments for that additional right-of-use remain consistent with the standalone price for that add-on, including any unique conditions that become part of the contract as a result.

If both of those conditions are met, the lease modification effectively creates two separate contracts. If they aren’t, the modified lease isn’t a separate entity.

In addition, if the modification doesn’t create a separate contract, the lessee needs to reassess several important factors.

These include the classification of the lease, the term and purchase options, the discount rate, and the allocation of any lease considerations that may be changed by the modification.

Lease Accounting Software and IFRS

The International Financial Reporting Standards (IFRS) provide accounting rules and guidelines to help make company financial statements more transparent and easier to understand.

They’re designed for public companies, and IFRS currently has provides for over 150 jurisdictions, including those in the European Union. The United States uses a different system, the GAAP.

IFRS 16 specifies how leases will be recognized, measured, recognized and presented, and it outlines what will be disclosed. It requires lessees to recognize assets and liabilities for all leases that extend for over 12 months where the underlying asset has significant value.

How Lease Accounting Software Helps with Estate Management

Wills are complicated, and so is estate management. In some wills and estate resolution scenarios, the assets are complex, and there are leases involved in property, cars and so on. Lease accounting software can help sort out these assets to give heirs, lawyers and anyone else with an interest in the estate a picture of what’s in the lease portfolio and how much it’s worth. This can provide financial clarity and eliminate confusion, and in many instances this kind of estate management from lease accounting software can be invaluable.

Get the Best Lease Accounting Solution from iLeasePro

At iLeasePro, we understand every aspect of leasing, including FASB lease accounting. That means we know what lease features are involved, what security protections need to be included, and how they can best be applied to your business leasing situation.

We also know the ASC 842 standard inside out, and as such we know how lease accounting software has to work to be in compliant with that standard.

We’ve provided lease accounting software for small business, and for larger companies as well. Our lease accounting software pricing is among the best in the industry, and when you call us we can set you up with a lease accounting software free demo.

To do this, call us at 888-351-4606, or you can email us at info@ileasepro.com. 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.

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