December 16, 2021

New Lease Accounting Standard (ASC 842) Explained



Authored by Megan Kurz, CPA

The new Lease Accounting Standard (Accounting Standard Codification 842 – Leases, “ASC 842”) is complex and requires organizations that have U.S. GAAP reporting requirements to analyze all their leases.  In this article we will overview the main components. As many of you are aware, implementation of the new lease accounting standard (ASC 842) has been a topic of discussion for several years.  Adoption timelines for privately-held entities have fluctuated due to a variety of factors, including the pandemic.  Most recently, the timeline for private clients was deferred to 2022; meaning that ASC 842 will become effective on January 1, 2022 for calendar year-end entities.  Governmental entities will be subject to similar guidance through GASB 87, which we will cover in a future note.

ASC 842 is complex.  It will require lessors and lessees to analyze all of their lease arrangements, and will significantly impact accounting for most leases and the balance sheets of most organizations. In an effort to make the guidance more relatable, we offer the following summary of key phases of an ASC 842 implementation:

  1. Identifying the Lease Population: ASC 842’s analysis impacts all lease arrangements that Companies are engaged in.  An often time-consuming and overlooked aspect of adoption is the identification of the full population of existing leases for the organization.  For instance, operating leases previously recorded only via rental expense, or leases embedded within other contracts, may prove difficult to identify.  Additionally, assessment of lease terms and payment escalations over time will take thoughtful analysis. We recommend that accounting teams allow adequate time for this exercise, and partner closely (and early) with operational leaders to ensure a complete scope of all leases for evaluation.
  2. Initial Implementation:  Upon adoption of ASC 842, organizations must convert applicable existing leases to be accounted for under the updated guidance.  Businesses have various options for remeasurement, including grandfathering provisions in some instances, as well as other practical expedients that can be used as they look to: (1) assess applicability/treatment under ASC 842, (2) remeasure existing leases, (3) record existing leases for the implementation, and (4) calculate the associated modified retrospective adoption calculation (opening retained earnings impact).  Our team at KDP is well-versed in these areas and we are available to help with the complexities of these calculations.
  3. Ongoing Finance, Accounting & Compliance: Following adoption (i.e., implementation) of ASC 842, companies will have new ongoing financial reporting considerations for leases.  These include, but are not limited to: evaluation/measurement and recording of new leases originated post-adoption, regular maintenance of the leases in terms of ongoing calculations of journal entries, amortization schedules, interest calculations, and other factors. We recommend utilization of a technology/software solution to assist with the ongoing accounting aspects of ASC 842, and have access to cost effective technology solutions through our alliance with RSM that we can recommend and help demonstrate.  It should also be noted that ASC 842 may significantly impact the landscape of some entities’ Balance Sheets, therefore entities with bank / debt covenant reporting requirements should engage with their lenders as soon as possible to discuss these impacts in advance of upcoming compliance reporting requirements.

KDP’s Advisory Team has developed the knowledge and resources in-house to assist with your implementation of ASC 842 and prepare your Organization for their accounting and financial reporting needs.  Our goal is to streamline and simplify the ASC 842 implementation process for your organization, and we welcome the opportunity to discuss with you and your accounting team.  Please feel free to contact me directly, or connect with your KDP relationship partner to learn more about these service offerings.

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Megan Kurz, CPA – Partner, Business Advisory Leader

Megan obtained her B.A. in Business Administration from Southern Oregon University in 2005, followed by her Master of Accounting from the University of Oregon in 2006. Following graduation, she joined KPMG (“Big 4” International CPA firm) in Portland, Oregon where she served a variety of multinational publicly-traded clients in the manufacturing, technology, and forest products sectors.

After approximately eight years at KPMG and promotion to Senior Manager, Megan was recruited to Lithia Motors, Inc. as Senior Director. She assumed responsibility for the Corporate Finance activities and also led the Investor Relations function. In 2019, Megan joined the KDP team and became a partner in 2021.

For more information on how the KDP Certified Public Accountants, LLP can assist you, please call us at +1 (541) 773-6633.