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What You Need To Know About New Lease Accounting Standards

By Drew Lockard, Reid Brooks and Adam Sanderson

The Financial Accounting Standards Board’s (FASB) Accounting Standards Codification Topic 842 (Topic 842), issued in 2016, will have a significant impact on how businesses manage, account for and report leases. Topic 842 will require organizations who lease assets— referred to as "lessees”—to recognize, on their balance sheet, the assets and liabilities for the rights and obligations created by those leases with terms greater than one year.

Consistent with current Generally Accepted Accounting Principles (GAAP), the lessee’s recognition, measurement and presentation of expenses and cash flows arising from a lease will depend primarily on its classification as a finance or operating lease. However, unlike current GAAP—which requires only capital leases to be recognized on the balance sheet— the inclusion of a lessee’s operating leases will increase an organization’s liabilities; potentially creating issues including potential bank covenant compliance, debt to equity ratios and the calculation of certain non-GAAP measures. Topic 842 also requires additional qualitative and quantitative disclosures to help investors and other financial statement users to better understand the amount, timing and uncertainty of cash flows arising from leases.

The accounting by organizations that own the assets leased by the lessee—also known as lessor accounting—will remain largely unchanged from current GAAP. However, Topic 842 contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014.

Topic 842 will require public companies to include all leases with terms greater than one year on their balance sheet for annual and interim reporting periods beginning after December 15, 2018 (Effective Date).  The private company Effective Date provides a one-year deferral, December 15, 2019, for annual reporting periods and interim periods the following year. Early adoption is also permitted for all entities.

Lease Accounting Challenge - Governance

Typically, these agreements are entered into by multiple, disparate departments and not centrally managed. Payments for leases are processed either through a centralized accounts payable (AP) group or by the originating department. The challenge is to integrate not only the contract origination and management processes, but also the payment processes. Integrating purchase order (PO) and non-PO AP processes with lease contracts is most likely not done in your organization today.

How Can Dacarba Help?

Topic 842 represents a principles-based accounting standard opening the door to varying interpretations of the same accounting guidance, even between peers within similar industries. Additionally, the lack of transition resource group (TRG)-equivalent for ASC 842 creates the need for industry-specific consortiums to address implementation challenges. 

Dacarba, an Opportune LLP company, can offer technical assistance and lease discovery by leveraging our Topic 842 experience and lessons learned such as the importance of a clearly documented approach to adoption, proving completeness of the lease population and locating unidentified leases. Dacarba also facilitates roundtables with industry peers to discuss common issues and call upon our experience to act as a client-advocate in situations where audit firms are reaching inconsistent answers with industry peers.  

Dacarba's Complex Financial Reporting practice includes members who have served lead roles on Fortune 250 Topic 842 cross functional teams. Dacarba can also implement any of a number of large lease software solutions, including Nakisa, PowerPlan, IBM TRIRIGA and Lease Accelerator to streamline the implementation process.