Transitioning From the ASC 840 to the ASC 842 Lease Accounting Standard

Transitioning to the ASC 842 lease accounting standard, which is the updated lease accounting standard issued by the Financial Accounting Standards Board (FASB), requires a systematic approach to ensure compliance and accuracy in financial reporting. ASC 842 was developed to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Here’s a detailed process with examples to successfully transition to the ASC 842 lease accounting standard:

1. Project Planning and Team Assembly

• Objective: Establish a project team and plan that encompasses all the necessary steps for a successful transition. This includes setting timelines, assigning responsibilities, and defining the scope of the project.
• Example: A company might form a cross-functional team including members from accounting, IT, real estate, and legal departments to oversee the transition.

2. Inventory of Lease Contracts

• Objective: Compile a complete inventory of all leasing agreements, including both lessee and lessor contracts, to determine the scope of the impact.
• Example: Collecting and reviewing all contracts, including equipment leases and real estate leases, to identify which contracts meet the definition of a lease under ASC 842.

3. Abstracting and Classifying Leases

• Objective: Review and abstract critical information from lease documents, such as lease term, payment terms, and options to renew or terminate, to classify each lease as either an operating lease or a finance lease under ASC 842.
• Example: An entity might use a lease management system to input data from each lease agreement, such as lease commencement dates, monthly lease payments, and incremental borrowing rates, to assist in classification and measurement.

4. Lease Measurement and Recognition

• Objective: Apply the appropriate lease accounting treatment for each lease based on its classification. This involves measuring the lease liability and right-of-use (ROU) asset at the lease commencement date.
• Example: For an operating lease, a company would measure the lease liability as the present value of lease payments not yet paid, discounted using the incremental borrowing rate. The ROU asset is typically measured at the same amount as the lease liability, adjusted for any prepaid lease payments or lease incentives received.

5. Transition Method and Practical Expedients

• Objective: Choose a transition method (retrospective or cumulative effect adjustment) and decide whether to apply practical expedients, which simplify the adoption process by allowing certain exemptions.
• Example: A company may choose the cumulative effect adjustment method, which applies the new standard at the adoption date without restating comparative periods. They might also elect the 'package of practical expedients,' which allows them not to reassess whether expired or existing contracts contain leases, lease classification, and initial direct costs.

6. Implementation of New Lease Accounting Software

• Objective: Implement or upgrade lease accounting software to manage the increased complexity and disclosure requirements of ASC 842.
• Example: Selecting and deploying a lease accounting system like iLeasePro that can handle the calculations, reporting, and disclosure requirements of ASC 842, including comparative reporting capabilities for the transition period.

7. Training and Change Management

• Objective: Educate staff on the new standard and its impact on the organization’s financial reporting and operations.
• Example: Conducting training sessions for accounting and finance staff on the new lease accounting rules, including how to use any new software or systems adopted as part of the transition.

8. Ongoing Compliance and Disclosure

• Objective: Ensure ongoing compliance with ASC 842 by establishing processes for the continuous monitoring and reporting of leases. This includes preparing the extensive disclosures required by ASC 842, which provide detailed information about an organization’s leasing activities.
• Example: Regularly updating lease information in the accounting system, reassessing lease classifications if changes occur, and preparing annual and interim financial statements that include the required lease disclosures.

Let iLeasePro Help You in Your Auditing Journey

Transitioning to ASC 842 is a complex process that requires careful planning, detailed execution, and ongoing management. By following these steps, organizations can ensure compliance with the new standard and provide more transparent and accurate financial reporting.

At iLeasePro, we’ve been helping companies understand and implement ASC 842 since it replaced ASC 840 in December of 2021. We know standard inside out, and we know that iLeasePro will help you be in compliance and pass your audit.

We’ve done this for both small and large businesses, and we’ve also helped these companies use ASC 842 as a business tool to operate more efficiently, get better reporting and use their leases as assets. When you call us we can set you up with a lease accounting software free demo so you can see how it all works.

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.