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New lease accounting standards: What private companies need to know

Gearing up for ASC 842

The new Financial Accounting Standards Board (FASB) and international financial reporting standards (IFRS) lease accounting standards (ASC 842 and IFRS 16) will take effect in 2020 for private companies. The standards bring many leases onto the balance sheet and could significantly impact a business’ financial statements.

Lease accounting (ASC 842) for private companies

Lessons learned from public company implementations

Public companies have been working to comply with the new standard on lease accounting since the beginning of 2019. Analysis of their preparation successes and challenges provides critical ASC 842 lessons for private companies approaching a 2020 deadline. Explore the five lessons learned we’ve observed.

Implementation considerations for private companies

Staying on track with the new lease accounting standard, ASC 842

ASC 842, for private companies, requires a shift in mindset. The purpose of ASC 842 is to bring most operating leases, which are currently accounted for off-balance sheet, onto the balance sheet. As a result, ASC 842 changes the definition of a lease.

Because of this complex change, private company executives should understand what constitutes a lease. They also must appropriately identify which contracts are leases or contain leases, and implement the necessary changes to their accounting systems.

Find out how to make sense of this complicated standard and develop strategies for overcoming unforeseen challenges in the implementation process. See our latest report, Implementation considerations for private companies: Staying on track with the new lease accounting standard, ASC 842.

What private companies need to know about applying the new lease standard

What does the road ahead look like for private companies?

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (codified as Accounting Standards Codification Topic (ASC) 842). ASC 842 introduces a lessee model that brings most leases onto the balance sheet; aligns certain of the underlying principles of the lessor model with those in ASC 606, the FASB’s new revenue recognition standard; and addresses other concerns related to the nearly 40-year-old leasing model from the previous guidance.

Practitioners have estimated that $2 trillion1 of lease liability (with corresponding recognition of leased assets) will be recorded to S&P 500 balance sheets alone as a result of the application of the new leasing guidance. What does the road ahead look like for a private company like yours?

Download the What private companies need to know about applying the new lease standard report, which highlights key considerations related to implementing the new leasing standard.

Gearing up for the new lease accounting standard

Choosing an approach and technology platform to meet the new requirements for private companies

For private companies, the new lease accounting standard ASC 842 goes into effect for the calendar year starting January 1, 2020, and time to prepare is quickly running out. Based on the experiences of many public companies implementing lease accounting technology solutions to comply with the new requirements, it often takes longer than anticipated for a new tool to be fully operational. Achieving compliance could be a complex challenge that may require major changes to systems and processes. It’s not too soon to act now.

Today, many private companies do not have systems or technology solutions to effectively manage lease agreements.

Download the Gearing up for the new lease accounting standard report to learn best practices for choosing an approach and actions to take sooner rather than later.

Identifying embedded leases for private companies

Are leases hiding in your contracts?

When it comes to ASC 8422 compliance, the challenges related to accounting for known leases may be grabbing headlines, but identifying contracts that contain embedded leases could add another level of difficulty for private companies. The phrase “embedded leases” may sound daunting or confusing, but the concept is straightforward: Embedded leases are leases contained within larger arrangements.

Download the Identifying embedded leases for private companies report to learn more about identifying embedded leases and ongoing accounting considerations for implementation.

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Endnotes

1 Source: Coming to a Balance Sheet Near You: $2 Trillion in Leases, The Wall Street Journal, November 2015.

2 Accounting Standards Codification 842 Leases (“ASC 842”), issued by the Financial Accounting Standards Board (FASB) as Accounting Standards Update 2016-02.

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