ASC 842 Income Statement Reporting

ASC 842 Compliance and Its Effects on Your Company's Income Statement

The ASC 842 lease accounting standard revolutionizes how companies account for leasing activities, with a significant emphasis on transparency and clarity in financial reporting. While much attention is given to its impact on the balance sheet, it's also important to understand how complying with ASC 842 affects the income statement. This guide aims to demystify the compliance process and outline the changes you can expect on your income statement.

Compliance Essentials with ASC 842

Compliance with ASC 842 requires a company to recognize lease liabilities and Right-of-Use (ROU) assets for almost all lease contracts, fundamentally altering lease accounting practices. Here's a step-by-step approach to ensure your company aligns with these requirements:

Step 1: Identify Your Leases

The first step towards compliance is to conduct a comprehensive review of all your company's contracts to identify which arrangements qualify as leases under ASC 842. This may include traditional leases for office space or equipment, as well as other contracts that might not have been previously classified as leases but now meet the criteria.

Step 2: Classify Your Leases

Under ASC 842, leases are classified as either finance leases or operating leases. This classification affects how leases are reported on the income statement, so it's crucial to understand the criteria for each category.

Step 3: Calculate Lease Liabilities and ROU Assets

For each identified lease, calculate the lease liability as the present value of lease payments. Simultaneously, calculate the ROU asset, typically based on the lease liability, adjusted for prepayments or initial direct costs.

Step 4: Record and Report

Adjust your accounting records to include the calculated lease liabilities and ROU assets. Ensure that your financial statements reflect these entries accurately, adhering to the ASC 842 requirements.

Impact on the Income Statement

1. Lease Expense Classification: The distinction between finance leases and operating leases under ASC 842 affects how lease expenses are reported on the income statement. For finance leases, interest on the lease liability and amortization of the ROU asset are recognized separately, impacting both operating income and interest expense. For operating leases, a single lease cost is calculated and recognized on a straight-line basis over the lease term, typically affecting operating expenses.

2. Expense Timing and Recognition: The timing and recognition of expenses may shift under ASC 842. Finance leases will result in a front-loaded expense pattern due to the interest component, while operating leases will see a more even expense recognition over the lease term.

3. Impact on Profitability Metrics: The classification and timing of lease expense recognition under ASC 842 can influence key profitability metrics and ratios reported on the income statement, such as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) and operating income.

Ensuring Smooth Transition to ASC 842

• Leverage Technology: Utilize lease accounting software, like iLeasePro, to manage the calculations and reporting requirements efficiently.
• Educate Your Team: Ensure that your accounting and finance teams are well-versed in the nuances of ASC 842, particularly the changes affecting the income statement.
• Seek Professional Advice: Consulting with accounting experts or advisory services can provide valuable insights and guidance through the transition process.

Adapting to ASC 842 is more than just a compliance exercise; it's an opportunity to enhance the transparency and accuracy of your financial reporting. By understanding and implementing the steps required for compliance, and recognizing the standard's impact on your income statement, your company can navigate the challenges of ASC 842 with confidence. This proactive approach not only ensures regulatory compliance but also provides stakeholders with a clearer view of your company's financial performance.

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.