ASC 842 Management Discussion

The ASC 842 Impact on the Management Discussion and Analysis (MD&A) Section

ASC 842, also known as the Leases standard, is an accounting standard issued by the Financial Accounting Standards Board (FASB) that changes how companies account for leases. Under ASC 842, organizations are required to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under the previous accounting standards. Here's an instructional article on how to comply with ASC 842 and its impact on the Management Discussion and Analysis (MD&A) section of a company's financial disclosures:

Complying with ASC 842

1. Identify Leases:
Companies must review all contracts to identify arrangements that meet the definition of a lease under ASC 842. This includes agreements that convey the right to control the use of identified property, plant, or equipment for a period in exchange for consideration.

2. Classify Leases:
Leases are classified as either finance or operating leases. The classification affects how lease expenses are recognized and reported in the financial statements.

3. Recognize and Measure Leases:
For both types of leases, a right-of-use (ROU) asset and a lease liability must be recognized at the lease commencement date. The lease liability is measured at the present value of lease payments, while the ROU asset is based on the lease liability, adjusted for any prepaid lease payments or initial direct costs.

4. Prepare Disclosure Requirements:
ASC 842 expands the disclosure requirements for leases. Companies must provide qualitative and quantitative information, including significant judgments made in measuring leases and the amount of lease assets recognized in the balance sheet.

5. Implement Processes and Controls:
Companies should establish robust processes and internal controls to identify and manage leases throughout their lifecycle, ensuring continuous compliance with the standard.

6. Use Technology Solutions:
To manage the complexity of tracking and reporting leases, companies may consider leveraging specialized lease accounting software,like iLeasePro that complies with ASC 842.

Impact on MD&A

ASC 842 will have significant impacts on a company's MD&A, including:

1. Balance Sheet Changes:
The recognition of lease liabilities and ROU assets will change the balance sheet's composition, potentially affecting debt covenants and financial ratios.

2. Income Statement and Cash Flow Statement:
Operating lease costs, previously shown as a single line item, are now split between amortization of the ROU asset and interest on the lease liability. This could change the company's reported earnings and operating cash flows.

3. Key Performance Indicators (KPIs):
ASC 842 may impact KPIs and metrics used by management to evaluate performance. These changes should be explained in the MD&A.

4. Liquidity and Capital Resources:
The MD&A must discuss the impact of ASC 842 on the company's liquidity and capital resources, including any changes to lease commitments and the timing of cash flows.

5. Critical Accounting Policies and Estimates:
Companies should describe their policy for accounting for leases under ASC 842 and any significant judgments and estimates used in measuring lease liabilities and ROU assets.

6. Future Lease Commitments:
While future lease commitments were always disclosed, they will now be recognized on the balance sheet, requiring an explanation of how these commitments will impact future financial position and cash flows.

7. Transition Disclosures:
During the period of adoption, companies must disclose the nature and effect of the accounting changes from ASC 840 to ASC 842 in the MD&A.

In conclusion, compliance with ASC 842 requires a thorough review and possible reformation of current lease accounting practices. Companies must recognize and disclose all leases on the balance sheet, which will impact many areas of financial reporting and necessitate clear, comprehensive communication in the MD&A section. Stakeholders, including investors and lenders, will require this information to understand the full financial implications of a company's leasing activities under the new standard.

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.