On July 19, 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standard ASC 842. From the FASB, website, this standard requires that:
The amendments in this Update require that lessors classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if both of the following criteria are met:
- The lease would have been classified as a sales-type lease or a direct financing lease in accordance with the classification criteria in paragraphs 842-10-25-2 through 25
- The lessor would have otherwise recognized a selling loss at lease commencement.
The Essential Ingredients
Collaboration and proactive project management are two essential ingredients to ensuring a successful ASC 842 adoption initiative. If your company is experiencing any of the following, we are here to help:
- Missing or incomplete contract records
- Poor documentation underlying current lease accounting classification and accounting decisions
- Material differences in reconciling your current lease footnote to supporting schedules and your general ledger
Critical Stakeholders
While it isn’t uncommon to run into these types of technical landmines, resolving them by the end of the 2022 fiscal year is imperative. This will ensure that your company complies with all ASC 842 adoption standards. Critical stakeholders who should participate in conversations and your adoption working group include:
- Purchasing colleagues (who are entering into these leases)
- Real estate groups (for larger companies)
- Facilities operators
- General managers
- Operations managers (at the plant level)
- IT and Tax departments
If your company is encountering any of these common ASC 842 landmines, we’re here to help. To learn more about we can assist with GAAP implementation and other Private Equity Services, click here.