Lease Accounting (ASC 842)
The lease accounting standard is a substantial change in lease accounting under which all companies will need to record leases (including operating leases) on the balance sheet.
Our experience in helping clients adopt ASC 842 has presented common challenges that all companies will eventually have to face. We have explored issues that often arise and have identified them.
Common Challenges
Gathering all of the necessary data can be time consuming:
Identifying the existing leases while obtaining necessary documentation is often a time consuming project. It is not uncommon or unusual for companies to find that there are hundreds of leases; in addition to the leases and added amendments, we often need information on the fair value and residual value – the underlying asset – along with the incremental borrowing rate information. Working to obtain this data is often an arduous process and takes more time than anticipated.
Difficult to apply:
ASC 842 is a significant standard with many technical provisions. While not as theoretically challenging as the revenue recognition standard (ASC 606), we have found that most companies have some complex issues to sort through.
These issues may include:
- Real estate lease with rent abatements
- Construction allowances
- Rent escalations and other clauses such as the landlord's right to terminate the lease early
Many companies have equipment leases that include maintenance & variable components that may be disconnected from one another.
New application requirements:
Calculating the lease asset (termed: “Right of Use” asset) and lease liability along with the expense associated with leases is complex and typically requires a new accounting application. Like any system implementation, companies must plan and budget for the time and expense of acquiring and implementing a lease accounting system.
Reading through leases can be laborious:
To properly apply ASC 842, all the leases and relevant amendments must be understood from end-to-end.
Practical expedients:
The standard provides for several practical expedients upon adoption that we highly recommend employing.