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Lease Accounting
What You Should Know to Effectively Manage Change
The new Lease Accounting Standard (ASC 842, IFRS 16, GASB 87), fundamentally changes how companies in nearly every industry will account for and present leases in their financial statements.
The new guidance affects your organization’s accounting, financial statements, and disclosures. It may also require changes to your operational processes, debt covenants, correlating internal controls, and supporting business systems. TOPIC 842 requires your organization to:
RECORD
a Lease liability and a Right-of-Use asset on the balance sheet for all lease types.
FOLLOW
a modified retrospective transition approach for existing and expired leases
ASSESS
service contracts for embedded leases which, if found, must also be recorded.
CAPTURE
the information needed to provide expanded qualitative and quantitative disclosures for both lessee and lessor transactions.
FOCUS
on lease contract administration to ensure contract amendments and modifications are appropriately accounted for in financial records.
PROVIDE
auditors with documentation supporting your Company’s completeness assertion, ensuring that all material leases have been identified and accounted for in your financial statements.
The exact effects of the lease standard on each business will vary depending on whether certain transitional practical expedients and on-going accounting policy elections are made. Your organization should carefully evaluate the impact and application of the expedients and elections.
Note that the effective date of your compliance with the standard depends on whether you are a public or private business entity.
What’s at the Core of the Principle?
Lessees should recognize the assets and liabilities arising from finance leases, operating leases, and contracts containing leases, on the balance sheet. (Lessor accounting is relatively unchanged)
Implementation of the core principal requires:
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A lessee to recognize a right-of-use (ROU) asset and a lease liability for all leases (including operating leases) with a term greater than 12 months—which may significantly increase reported assets and liabilities for some lessees.
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Determination if a contract contains a lease. The lease classification distinction will affect how lessees measure and present lease expense and cash flows and how lease types are captured on the balance sheet.
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Assessment of lease term and lease payments—which will consider lessee intentions regarding extension periods, renewal options, variable lease components, termination penalties or other asset-related factors.
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Classification of a lease contract as either a finance or operating lease.
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Determination of presentation in the financial statements and overall needs from current ERP to achieve new accounting and financial reporting requirements.
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Development of newly required disclosures for key qualitative and quantitative information regarding the lease portfolio.
Timing - Will Your Organization
be Ready?
ASC Topic 842 effective dates are as follows:
When is Topic 842 effective?
Public Business Entities
Annual and interim periods in fiscal years beginning after December 15, 2018
Other Types of Entities
(Private companies and NFPs)
Annual periods in fiscal years beginning after December 15, 2021
Interim periods within fiscal years beginning after December 15, 2022
* Subject to FASB’s proposal on effective dates for major standards.
Your Organizational Needs -
How We Can Help
Horn Solutions provides a five step approach to ASC 842 implementations.
Our team can provide the following services to your organization to address the new requirements of the lease standard:
Phase I
Planning, Determine Contract Landscape
Conduct workshops and interviews, and develop a distributive questionnaire to: (1) determine the preliminary areas with significant impact (i.e., business segment, geographic location, or other), (2) understand the business accounting systems for contracts, and (3) develop an understanding of the contracts and lease customer arrangements.
Phase II
Current State Assessment and Diagnostic
Identify the nature of lease arrangements, and: (1) select contracts to assess and document current lease arrangements and related accounting, (2) review and determine processes for contract capture and administration in supporting accounting systems, (3) assess the adequacy of systems to support new requirements for financial accounting and reporting efforts (i.e., accounting, disclosures, etc.), and (4) assess and select a new software solution (if necessary).
Phase III
Implementation, Validation, & Future State Design of Lease Accounting Model
Our team will: (1) develop consistent principles for capture of lease arrangements, (2) assist with data migration to supporting lease software, (3) capture key accounting data in the lease software, (4) validate and test software performance and general ledger processing, and (5) assist in the development and preparation of disclosures. We will also update or develop accounting policies and procedures and identify financial risks and design, develop, and document necessary internal controls.
Implementation, Validation, & Future State Design of Lease Accounting Model
Phase IV
Your team will need introduction to new policies, processes, procedures and internal controls. We can assist with development of training materials and delivery to the organization for all interested groups, including (but not limited to) financial accounting and reporting, contract administration, and internal controls.
Phase V
Implementation, Validation, & Future State Design of Lease Accounting Model
To determine whether the newly developed policies, procedures, processes and internal controls are functioning as intended by management, we will assist you: (1) develop an internal assessment program to validate the operational effectiveness of the new infrastructure, and (2) design and implement a template to capture the results of the testing for presentation to management and the external audit team.
