Lease Accounting in Less Than a Minute
In 2016 the Financial Accounting Standards Board (FASB) issued new lease accounting rules (ASC 842) which require that all leases be recorded on the balance sheet in the form of a Lease Liability and a corresponding Right of Use Asset.
Publicly traded companies were required to implement the new rules in 2019, private companies and non-profits are next.
Private companies and non-profits will need to implement starting January 1, 2022. (the new rules apply for all reporting periods beginning after December 15, 2021)
Why are we doing this? After the Enron debacle in 2001, congress introduced sweeping reforms in financial reporting via the Sarbanes-Oxley Act of 2002. This legislation contained a mandate that the Securities and Exchange Commission (SEC) perform a study of off balance sheet arrangements. The SEC commissioned the study and published its findings in a 2005 report identifying operating leases (as well as a half-dozen other arrangements) as a form of off-balance sheet financing. The FASB then got to work on new rules focused on bringing operating leases onto lessee balance sheets. Finally, in 2016, after multiple iterations of drafts and public outreach, the FASB issued new lease accounting rules, ASC 842.
What should companies do now? On January 1, companies will need to calculate the present value of future rental payments associated with leased assets and record this amount as a Lease Liability and a corresponding “Right of Use” (ROU) asset. Subsequent to January 1, companies will need to amortize each of the lease liability and ROU assets separately, generally drawing down to a zero balance by the end of the lease term. If you have more than a dozen leases at your company, you might want to look at what tools are available and read the next article about automation.
Recommended reading: “Top 5 Reasons to Automate Lease Accounting”
