Here’s How The New Lease Accounting Standards Will Impact Your Business

Accounting as a business owner can be time consuming and frustrating. There are always a particular set of rules and standards you need to follow to properly account for your company’s financial dealings. In the USA, the FASB has put forward GAAP as the set of accounting rules that companies must follow. It keeps things level and fair, and also ensures there’s a level of consistency for those reviewing accounts. 

However, standards sometimes change which can confuse even accountants, let alone business owners. A change in standards means you have to conform to a slightly different calculation, or a new way of drawing up your accounts. For example, the new lease accounting standards, ASC 842, have taken some by surprise. So, how can these new standards affect your business?

No More Use Of The Old Lease Accounting Standard

The older lease accounting standard was ASC 840. It has been superseded by ASC 842. The usage of ASC 840 finished for year end accounting based companies in 2019, and for public companies, 2018. They’ve been around for a few years now so your transition from ASC 840 to ASC 842 should be complete.

If it isn’t and you’re still using ASC 840’s lease accounting rules then your accounting is out of date and you should make an effort to bring it into line. Check with your accountant.

What Has Changed?

Off balance sheet leasing activities were always problematic to auditors and those checking financial accounts. The new lease accounting standards are built to combat that. Under the old ASC 840 rules a limited number of leases made it onto the balance sheet. Now, the new lease accounting standards are designed to improve financial reporting and increase transparency. The new lease accounting standards also ensure organizations disclose vital information about leasing arrangements to investors. If you’re going to be accounting for leases effectively, you need to know what’s changed.

An Example of transparency in action: A train firm that purchases trains carry a huge amount of debt, whereas a firm that leases its trains looks way less debt laden on the balance sheet. In reality, the two have very similar, at least in terms of materiality, lease obligations.

So, as you can see, ASC 842 lease accounting is trying to bring into line companies and to level the playing field. It’s been well received by some, although some accountants preferred the old method.

What You Need To Do?

You need to reduce off balance sheet activities as much as possible. These are things like capital leases, long term forms of debt, etc. Payment obligations from operating lease agreements are great examples as off balance sheet activities. These now need to be brought to the balance sheet.

The whole process is to streamline accounting for leases in line with US GAAP. It should make it easier, not harder. If this confuses you at all you should speak to an accountant or look into lease software arrangements to help you properly process your lease accounting.

Lease Type: It Matters

Remember the lease type matters. You can’t use the same rules for all lease types. For ASC 842, some are in scope, some are out. For example, cloud computing arrangements are out of scope, a lot of people use these and may not realize. Make sure you look at the exact lease arrangements you have before applying the new lease accounting standards.

Yes, the new accounting standards can and probably have already impacted the way your business accounts for leases