5 things you may not know about the lease standard
By Ane Ohm, LeaseCrunch | Originally posted on www.accountingtoday.com.
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.