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Although the new lease accounting standard (ASU 2016-02, Leases (Topic 842)) does not go into effect for calendar year-end private companies until January 2021 (January 2019 for public companies), there are steps you should take now to ensure that you are prepared.
The new lease standard will present significant changes to the balance sheets of lessees. It will involve a lot of time and resources in order to extract the information needed from leases in order to comply with the new standard. 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.
Leases with a term over 12 months will now be recorded on the balance sheet of the lessee. A company will record a right-of-use asset as well as a corresponding lease liability. Currently, many companies try to structure a lease in order to avoid a capital lease classification, and, therefore, no recorded liability. The new standard will prevent this. 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.
There are many factors that must be analyzed and 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.
What should you do now:
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.
Many companies may currently be focused on the new revenue recognition standard, but the effective date of the new lease standard is quickly approaching and companies should be prepared. Detailed analysis and calculations will be required.
DGC is here to help you transition to and adopt the new guidance.
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 engagement team or Celina Carter, CPA at 781-937-5355 / email@example.com or Jackie Reinhard, CPA at 781-937-5721 / firstname.lastname@example.org.