If yours is like most organizations, you’re just getting comfortable with ASC 606 and its revenue recognition requirements. That is, you have the procedures and software in place to deal with it — mostly. And now, coming fast on its heels is ASC 842, which dramatically changes the way leases are accounted for.
The intention with 842 is to close loopholes in ASC 840 that have led to many leased assets not showing up on balance sheets. The result could be a significant skew of debt-to-equity ratios. The fix calls for both capital and operating leases to be accounted for. And, just like with ASC 606, lease accounting is turning out to be more work than anticipated. Getting ledger entries right is tough enough, but the real issue is ferreting out all the leases that may be lurking in contracts, where you wouldn’t expect them. For instance, some logistics companies may paper the use of trucks as a lease, while cloud computing companies may show equipment use as a lease.
Short-term leases, with a span of less than 12 months, may still be excluded, but all others should now show up on the ledger. By some estimates, that will add trillions to corporate balance sheets(opens in new tab).
For CFOs, finding all these leases means examining service contracts already underway and implementing a process to evaluate new contracts as they come in.
Your accounting software may not be up to the task of following the standard. ASC 842 is complex, so spreadsheets may be required to track operating leases until your chosen software fully supports the standard. Of course, complexity plus spreadsheets often add up to errors. As many as 100 fields may need to be tracked per lease(opens in new tab), so check your and others’ work.
Most public companies should be well along in their efforts by now, as compliance is required for 2019. Private companies, nonprofits and certain public companies with small floats have been given a reprieve until 2021, but given the complexity of the standard, we recommend you don’t wait to get your lease accounting policies in line with ASC 842.