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Huth Thompson LLP

Accounting Lease Standard Soon to Take Effect

We have been talking (since 2013) about changes to lease accounting standards and now they are here! Approved by the Financial Accounting Standards Board, Accounting Standards Codification Topic 842 (ASC 842) Leases presents dramatic changes to how lease transactions are accounted for in your financial statements. This standard is effective beginning with 2020 calendar year-ends for non-publicly traded entities.

A “right-to-use asset” (long-term leased asset) and a lease liability, with a current and long-term portion, will be recognized for substantially all leases. This is similar to the prior accounting treatment of a capital lease. The only exception to this new lease standard is a lease with less than a 12-month term. Transition guidance is applicable as noted in ASC 842.

Entities will need to implement new or change existing business processes and internal controls to ensure compliance with the new guidance. We recommend entities begin this process now by doing the following:

  • Review the requirements of ASC 842 including transition guidance
  • Prepare an inventory of all lease data
  • Implement processes, systems and controls to maintain an inventory of lease data
  • Review agreements and determine the accounting under new lease rules
  • Calculate the effects on the entity’s financial statement
  • Communicate the effects to stakeholders
  • Educate employees on new standards
  • Evaluate any effects on terms used in future leases
  • Understand tax implications
  • Update accounting policy documents
  • Draft disclosures to meet new disclosure requirements
  • Develop a plan and timeline to implement the new standard
  • Consult your CPA if additional assistance is needed prior to year-end 2020