ASC 842 Balance Sheet Reporting

A Guide to Complying with ASC 842 and Its Impact on Company Balance Sheets

The ASC 842 lease accounting standard is a significant update from the Financial Accounting Standards Board (FASB) that affects how companies report their leasing activities on the balance sheet. If you're new to this standard, understanding its requirements and the impact on your company's financial statements is crucial. This guide aims to simplify the compliance process and explain how ASC 842 will change the way your company's leases are reflected on the balance sheet.

Step 1: Understand the Key Requirements of ASC 842

ASC 842 mandates that companies recognize nearly all leases on the balance sheet as Right-of-Use (ROU) assets and lease liabilities. This includes both finance and operating leases, which were not previously required to be recognized on the balance sheet. The goal is to provide a more accurate picture of a company's financial obligations.

Step 2: Identify All Lease Agreements

Begin by conducting a thorough review of all contracts to identify agreements that may be considered leases under ASC 842. This includes examining service contracts and other arrangements that may not have been classified as leases under previous accounting standards but meet the definition under ASC 842.

Step 3: Calculate the Lease Liability and ROU Asset

For each lease identified, calculate the lease liability as the present value of lease payments over the lease term. Concurrently, determine the ROU asset, which generally starts as the lease liability amount adjusted for any prepaid lease payments or initial direct costs. This step might require the use of specialized software or consulting with financial advisors to ensure accuracy.

Step 4: Adjust Your Financial Statements

Once you have calculated the lease liabilities and ROU assets, adjust your balance sheet accordingly. Lease liabilities should be recognized as liabilities, and ROU assets should be recognized as assets. This adjustment will increase both the assets and liabilities reported on the balance sheet, impacting several financial ratios and metrics.

Understanding the Impact on Your Balance Sheet

1. Increased Transparency: Your balance sheet will now reflect a more comprehensive view of your company's financial obligations due to the recognition of lease liabilities and ROU assets.

2. Changes in Financial Ratios: The inclusion of lease liabilities can affect key financial ratios, such as the debt-to-equity ratio, which may influence how investors and creditors view your company's financial health.

3. Management Strategies: With leases now on the balance sheet, companies may need to revisit their leasing strategies, negotiations, and overall financial planning to maintain favorable financial ratios and comply with loan covenants.

Tips for Smooth Compliance

• Leverage Technology: Consider using lease accounting software, like iLeasePro, to manage and streamline the calculation and reporting process.
• Stay Informed: Keep abreast of any updates or guidance from the FASB regarding ASC 842 to ensure ongoing compliance.
• Seek Expertise: Don't hesitate to consult with accounting professionals or advisory services specializing in lease accounting to navigate the complexities of ASC 842.

Complying with ASC 842 represents a significant change in how companies account for leases, offering greater transparency in financial reporting. By recognizing leases on the balance sheet as assets and liabilities, companies will provide stakeholders with a clearer understanding of their financial commitments. Following the steps outlined in this guide will help you navigate the transition to ASC 842, ensuring that your company remains compliant and your financial statements accurately reflect your leasing activities.

Get the Best Lease Accounting Software Solution from iLeasePro

At iLeasePro, we understand every aspect of leasing, including lease accounting financial reporting. That means we know what lease features are involved, how calculations need to be performed and recorded, and how you can best use your leases and lease data as a business asset.

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

We’ve provided lease accounting software for small businesses, 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.