GAAP lease accounting requirements have been updated, and companies must now comply with the new ASC 842 lease regulations regarding leasing standards. Topic 842 affects lessors’ and lessees’ processes for financial accounting and reporting of leases.
In this blog, I will mention 3 ASC 842 lease accounting updates to keep in mind for compliance. The first update affects both lessors and lessees, the second one only affects lessors, and the third only lessees.
Identification of assets
ASC 842 lease accounting standard changes how leases, counting equipment, and real state, must be defined and identify. The new rule requires to specify leases in a contract that conveys the right to control an identified asset.
You can specify whether the right to control is a right to obtain substantially all economic benefits from the use of the asset or the right to direct the use of an unidentified asset.
You must identify assets by explicitly or implicitly specify them in the contract, physically distinct them, and stating that the supplier does not have right of substitution.
Lessors will see a change in their financial statements and disclosures due to the new revenue recognition requirements. Companies acting as lessors will now have to report their lease-related income in accordance with the requirements of lessees, in other words, the timing and pattern of revenue recognition for the lease and non-lease components associated with a lease must be the same. Unifying recognition requirements makes financial reports consistent with one another and easier to compare.
Incremental borrowing rate
With ASC 842 lease update, lessees will most likely have to start calculating lease liability with incremental borrowing rate (IBR) since the implicit interest rate of each lease will become harder to calculate. The implied interest rate of a lease is calculated with historical data that companies will necessarily have, so IBR becomes a better alternative for calculating leasing interest.
These are just three of the updates to lease accounting and reporting, but if you want to learn more about other changes brought on by the ASC 842 lease requirements, click here.
Public companies must already be complying with GAAP standards. Private companies have until January 2020 to comply.
Pangea Group implements Crowe’s lease accounting optimizer in your existing Microsoft Dynamics 365 Finance & Operations (AX) instance, a solution that will help your company comply with ASC 842 lease regulations and IFRS 16 standards. Visit our website www.grouppangea.com or send us an email firstname.lastname@example.org to learn more about our implementation.