The effective date of the new lease accounting standard (ASU 2016-02, Leases (Topic 842)) for private companies is quickly approaching – January 2020 (January 2019 for public companies). Now is the time to consider how you can prepare for the adoption of the new standard.

The largest change as a result of the new lease accounting standard is the recognition of right-of-use assets and lease liabilities by lessees for leases classified as operating leases. Capital leases will be a thing of the past, and all leases will now be classified as either an operating lease or a financing lease. We recommend you first consider the quantity of leases your organization has in order to gain an understanding of the scope and needs of your organization. A lot of time and resources may be required to extract the information needed from these leases.

This new standard will require you to analyze your contracts, identify leases, and consider items such as lease and non-lease components, lease term, variable and fixed lease payments, and options to extend or terminate in order to determine lease classification. 

There are many factors that must be considered to determine the initial and subsequent measurement of the lease payments. This could be more complicated than you initially think. Inputs such as lease payments, discount rate, and initial direct costs will need to be determined, and a present value calculation is required. You will need to monitor changes to leases, such as lease modification, in order to determine if remeasurement is necessary.

As with most new standards, additional disclosures will be required to provide more insight for the users, both quantitatively and qualitatively.

Start thinking about transition and adoption of Topic 842

• The new lease standard may have significant implications on your covenant calculations and it will be best to speak with your bank prior to implementation. Although the cash flow related to the lease will not change, users of the financial statements will need to be educated on how the new standard impacts financial reporting and key performance indicators.
• Take an inventory of all of your contracts that may contain leases. For some companies, this will be a daunting task. All contracts must be analyzed. Not only must you consider your office lease, but also think about how many other contracts you have such as copiers, computers, office furniture, network services, etc. The standard applies to any contract in which you obtain the right to use an underlying asset. It is important to note that any leases that were missed under Topic 840 will need to be accounted for under Topic 842.
• Consider what systems are currently in place to manage your lease accounting and what your needs will be going forward. Companies may need outside support and/or to make a significant software investment in order to manage their lease accounting reporting in the future. 

Although there will be minor financial statement changes from the lessor side, lessors may find they need to change how they structure their leases in order to attract and retain customers.

DGC’s Technical Accounting Advisory team can guide you through this process by assisting with:

• Contract analysis and lease determination
• Lease classification
• Initial and subsequent measurement
• Transition and adoption
• Footnote preparation
• Workpaper preparation
• Analysis of lease accounting reporting needs 

For additional information about how the new lease accounting standard will impact your business, and what you can do to prepare, contact a member of your DGC client service team or Jonathan Butler, CPA at 781-937-5369 / jbutler@dgccpa.com or Jackie Reinhard, CPA at 781-937-5721 / jreinhard@dgccpa.com. Also, be sure to review DGC’s list of recommended first steps when creating your plan for the adoption of the new lease accounting standard.