LEASES (ASC TOPIC 842)

On Feb. 25, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02 Leases (Topic 842), a new standard that will govern the accounting for lease contracts. To affect these changes, this ASU, along with several related ASUs issued subsequently, amends the existing FASB Accounting Standards Codification (ASC) and creates a new Topic 842, Leases.

In the U.S., the standard is effective for private companies for fiscal years beginning after Dec. 15, 2021, and interim periods within fiscal years beginning after Dec. 15, 2022. For public business entities, certain not-for-profit entities and employee benefit plans that file financial statements with the U.S. Securities and Exchange Commission, the standard became effective for fiscal years beginning after Dec. 15, 2018, including interim periods within those fiscal years. Public not-for-profit organizations that have not yet issued (or made available to issue) financial statements reflecting the new lease accounting guidance may apply the standard for fiscal years beginning after Dec. 15, 2019, including interim periods within those fiscal years.

Are You Prepared to Implement the New Lease Accounting Standard?

With effective dates quickly approaching for private companies, now is the time to prepare for implementation of the new lease accounting standards. ASC Topic 842, Leases can create operational challenges as implementation teams grapple with the complexities of the new standard.

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Transition to ASC Topic 842, Leases

The purpose of this document is to illustrate a comprehensive example of how to transition from current GAAP (ASC 840) to the new lease accounting standard (ASC 842). This example uses a single lease example, rather than a portfolio of leases, to illustrate the accounting under current guidance, the transition entry to ASC 842, and go forward accounting for leases that existed at the effective date.

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FASB Accounting Standards Update 2019-01 Provides Clarity on Certain Leasing Standard Implementation Issues

On March 5, 2019 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-01, Leases (Topic 842): Codification Improvements. The update includes amendments that address issues brought to FASB’s attention by stakeholders about implementation issues. The following points are addressed specifically in the update:

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Leases: Not Just for the Footnotes Anymore

Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-02 Leases (Topic 842) is a new standard that will govern the accounting for lease contracts beginning with the 2019 calendar year-end for public companies and the 2020 calendar year-end for all other entities¹. To affect these changes, this ASU, along with several subsequently issued ASUs, amends the existing FASB Accounting Standards Codification (ASC) and creates a new Topic 842, Leases.

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The new lease standard replaces existing lease guidance included in ASC Topic 840, Leases. The key difference between existing guidance under ASC Topic 840 and the new guidance under ASC Topic 842 is the requirement for lessees to recognize on their balance sheet all lease contracts with lease terms greater than 12 months, including operating leases. Specifically, lessees are required to recognize on their balance sheet at lease commencement, both:

A right-of-use (ROU) asset, representing the lessee’s right to use the leased asset over the term of the lease; and,
A lease liability, representing the lessee’s contractual obligation to make lease payments over the lease term.

The new lease standard also requires lessees to classify leases as either operating or finance leases, which are similar to the operating and capital lease classifications under ASC Topic 840. However, the distinction between these two classifications under the new standard does not relate to balance sheet treatment but instead relates to treatment and recognition in the statements of income and cash flows.

Lessor accounting is largely unchanged from current U.S. GAAP, with the exception of some revisions made to ensure consistency with revised lessee guidance and with FASB ASC Topic 606, Revenue from Contracts with Customers.

Implementation of the new lease accounting standard may require more robust systems and controls in place to identify embedded leases, which is more consequential now that leases are to be recognized on the balance sheet. DHG is ready to assist you with developing and executing an implementation plan for the new standard, addressing any operational challenges you may face in the process.

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Lease Accounting: Reassessments and Remeasurements

As the COVID-19 pandemic forces many lessees to reevaluate their real estate requirements, the lease options they choose to exercise could call for a reassessment of lease classification and a remeasurement of lease liability and right-of-use (ROU) asset.

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