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By Joel C. Colbourn, CPA, MBA; Stephen G. Austin, CPA, MBA; and Jim LoPresti, MBA | Originally posted on www.journalofaccountancy.com
In early 2020, the COVID-19 pandemic added another element of business disruption for organizations to manage while the effective dates to comply for FASB’s new lease accounting standards were quickly approaching.
Following a pandemic-related delay, the new standard takes effect for entities within the “all other entities” category for fiscal years starting after Dec. 15, 2021, and for interim periods within fiscal years beginning after Dec. 15, 2022. The ramifications of the COVID-19 pandemic have affected organizations in ways we are yet to fully understand, and the impact on lease accounting processes continues to evolve in response to changes that have occurred in the business environment.
For public companies, FASB Accounting Standards Codification (ASC) Topic 842, Leases, took effect for fiscal years and interim periods within those fiscal years, beginning after Dec. 15, 2018. There is an exception for public not-for-profit entities, whose effective date is for fiscal years beginning after Dec. 15, 2019, including interim periods within those fiscal years.
Meanwhile, GASB delayed by one year the required implementation of GASB Statement No. 87, Leases, which is now applicable for fiscal years beginning after June 15, 2021.
COVID-19 arrived in early 2020 and spread rapidly and now has extended worldwide with the delta variant in 2021. By mid-March 2020, state and local governments began issuing restrictions shutting down many businesses other than health care and providers of “essential services.”… Read More
Why is the new lease accounting standard necessary? Click the image below to learn more about Topic 842 and the new lease accounting standards. Brought to you by Steve Austin, Managing Partner at Swenson Advisors.
Anticipated business disruptions due to the COVID-19 pandemic prompted the FASB on April 8, 2020 to formally propose the following delays in the effective dates for implementing Topic 842, Leases:
- For private companies and private not-for-profit (NFP) entities to fiscal years starting after December 15, 2021.
- For NFP entities that have issued or are conduit bond obligors for securities that are traded listed or quoted on an exchange or an over-the-counter market and which have not yet issued financial statements to fiscal years starting after December 15, 2019.
Critical Lease Accounting Topics Affected by COVID-19:
- Short or long term lease concessions:
- Do you have enforceable rights in your contracts for lease concessions?
- Will there be changes that result in lease modifications and lease re-measurements?
- If there are concessions, how will that affect the materiality treatment on your financial statements?
- With interest rates dropping, a lessee’s Incremental Borrowing Rate (IBR) may be impacted when calculating right-of-use (ROU) assets and lease liabilities:
- How will this affect balance sheets when entering into new leases or re-measuring existing leases?
- With commercial real estate values and discount rates dropping, how will this affect the Fair Value and lease classification as either finance or operating leases are reassessed?
- Other considerations stemming from the COVID-19 pandemic and the economic downturn will be such things as the likelihood of exercising renewal options, terminations or purchase options.
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We are here to help you navigate through all of these economic changes and the complex decisions you need to make in order to comply with Topic 842.… Read More
By Stephen G. Austin, CPA; Joel Colbourn, CPA; Ane Ohm, CPA; and Don Mitchell | Originally posted on: www.journalofaccountancy.com
In addition to causing enormous disruption to health, safety, and the economy across the globe, the coronavirus pandemic has significantly altered the landscape for CPAs related to the lease accounting standard.
The changes include a potential effective date delay of FASB’s new lease accounting standard for certain entities, including private companies; a monumental increase in the number of lease modifications requested by lessees and granted by lessors; and the need for disclosures related to a company’s lease accounting decisions in the new environment.
Here’s a closer look at lease accounting amid the coronavirus pandemic.
FASB’s Delay Proposal
In recognition of the business disruptions caused by the new standard, FASB has voted to issue a proposal that would delay by one year the effective dates of its lease accounting standard for certain entities. If approved, the delay to FASB ASC Topic 842, Leases, would apply to private companies, not-for-profits, and not-for-profit entities that FASB calls public not-for-profits, which have issued or are conduit bond obligors for securities that are traded, listed, or quoted on an exchange or an over-the-counter market and that have not yet issued financial statements.
The soon-to-be-proposed delay for private companies and private not-for-profits would make the standard effective for private companies and private not-for-profits for fiscal years starting after Dec. 15, 2021. The effective date for public not-for-profits would be fiscal years starting after Dec. 15, 2019.
Shelter-in-place, stay-at-home, social distancing, self-quarantine, and other directives have caused significant disruptions to business operations, with many businesses and industries being effectively shut down.… Read More
Finalizing lease accounting policies, reviewing all contract materials to validate the lease portfolio, preparing supporting documentation, performing the required calculations, and recording the opening entry.
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By Stephen G. Austin, CPA; Joel Colbourn; Phillip Doolittle; and Doug Renner | Originally posted on: www.journalofaccountancy.com
Public companies’ required implementation of FASB’s new lease accounting standard in 2019 means that financial statement auditors need to be prepared to make new judgments.
Although the private company implementation date for the standard hasn’t yet arrived, auditors of both public companies and private companies that prepare financial statements in accordance with GAAP will eventually need to determine whether adequate work has been performed to ensure a reasonable opening entry upon implementation. As part of understanding the entity’s processes and controls, auditors also will have to assess whether their clients or companies (in the case of internal auditors) have adequate go-forward processes in place to ensure that upon execution of a contract, a determination is made as to whether that contract is, or contains, a lease.
The new standard (FASB ASC Topic 842, Leases) calls for recognition of lease liabilities and right-of-use assets for lease arrangements previously identified as operating leases and capital leases (which are now called finance leases). This means that on the first day of a new fiscal year, the entity will have to prepare accounting entries to record this recognition. The auditor needs to understand how the client determined the entry balances recorded through this opening entry.
Most companies will adopt the package of three practical expedients by which the leases identified and recorded in the prior year will carry forward as the foundation for the opening entry. This assumes the previous accounting was handled correctly — perhaps a precarious assumption.… Read More
By Stephen G. Austin, CPA; Joel C. Colbourn; and Kristen Gibbons | Originally posted on: www.journalofaccountancy.com
FASB’s new lease accounting standard is having a significant effect on a broad range of balance sheets for all types of entities, with some companies reporting financial obligations of billions of dollars.
In addition to requiring large sums to be placed on balance sheets, the new standard is causing difficulties for preparers as they struggle to locate and extract data from their many lease contracts so they can comply with the new rules. But this is not the only difficulty preparers are facing.
Under the new standard as codified in FASB ASC Topic 842, Leases, contracts that are not clearly identified or labeled as leases may be “arrangements that contain a lease.” For example, a lease may exist when equipment is provided by a vendor in connection with the purchase of consumables or the delivery of a service. Discovery and deeper evaluation of these arrangements where leases may be hidden in plain sight has been a significant challenge for many preparers.
FASB’s previous lease accounting standard, Topic 840, also required evaluation of these arrangements, although some may say that this analysis was not considered as thoroughly as it is now that the lease liability belongs on the balance sheet under Topic 842. Often under Topic 840, the many “service contracts” that met the “arrangements that contain a lease” criteria were classified as some type of operating expense other than rent expense.
The correction of this accounting is probably a classification issue in the income and expense statement.… Read More
As with any accounting standard shift, the new lease standard (ASC 842) brings momentous changes to accounting processes and financial reporting. While the main differences are well-known, I’ve taken a particular interest in the smaller nuances that live within the new standard. (Yes, I’m an accounting nerd and I love learning about and discussing all things related to leases!)
In this article, I’m sharing five of those intricacies that you may not know about the new lease standard, but that are critical to making the transition.
1. Equity likely isn’t impacted
I recently got into an argument with a potential client about this one — not the best way to start out a new relationship! And I understand where he was coming from: When changes in an accounting standard impact assets or liabilities on the books, typically the difference flows through equity. In this situation, the new lease standard is unusual in that equity is most often not impacted for initial journal entries.
Here is the correct process to follow when transitioning leases from ASC 840 to ASC 842:
- Calculate your lease liability, which is the present value of all future lease payments after the initial application date.
- Remove existing lease balances, such as deferred rent. As you reverse these balances off the books, they should flow through the right-of-use asset, not through the equity balance as is common when implementing a new accounting standard.
- In most cases, the ROU asset is the lease liability, plus or minus the difference of those existing balances.
By Stephen G. Austin, CPA; Michael G. Fraunces, J.D.; and Alisia Scudder, CPA | Originally posted on: www.journalofaccountancy.com
By now, most public companies in the United States have adopted the new lease accounting standards as required on Jan. 1, 2019. Companies with noncalendar fiscal year ends will adopt the new standards sometime over the next few months.
Moving the measurements of operating leases from the footnotes of GAAP financial statements under FASB ASC Topic 840, Leases, to the balance sheet as assets and liabilities under Topic 842, Leases, has not been a simple task for corporate America. Now, private companies and most not-for-profit organizations face the same task. Entities with more than a handful of leases may be in for a surprise as to the time and expense required to address the complexity of the transition and analyze the related accounting rules that must be considered. They may also be surprised with the effect on financial statements and, perhaps, loan covenants due to potential significant changes in debt and related ratios.
Here are some of the lessons learned from act one with the public companies:
Gathering documents is a chore
In many cases, document management systems for operating leases have been less than ideal and certainly not well organized to be “Topic 842-friendly.” In our work assisting a Fortune 100 company in its compliance with Topic 842, a major challenge was locating and organizing all the relevant documents for making the assessment. Our work included assessing, on the company’s behalf, thousands of its agreements to determine whether they constitute leases under the new standard.… Read More