The Financial Accounting Standards Board met on November 10, 2021 and decided not to further defer the new lease accounting standard implementation date for nonpublic companies. What does this mean for CPA firms and their clients? It’s time to get started! And we are here to make it even easier for all of you. 

Implementing the new lease accounting standard is not a one-time exercise; it requires changes to processes and reporting controls. The sooner companies get started the easier it will be. 

An early priority is making sure clients assess the accounting policy elections and the practical expedients available to simplify implementation. By adopting the “package of three” practical expedients for leases that exist on the initial application date of the new lease standard, your clients limit the information needed to comply with the new lease standard because:

• Lease Identification: No need to examine existing contracts to determine if they contain a lease under the new lease standard.
• Classification: Do not need to reassess whether the lease should be classified as operating or finance under the new lease standard. Instead, if you properly classified the lease as “operating” under ASC 840, it is “operating” under ASC 842. If a “capital” lease under ASC 840, is a “finance” lease under ASC 842.
• Initial direct costs: Despite the change in definition for initial direct costs, you do not need to reassess these costs for existing leases.

With the adoption of the “package of three” and easy-to-use software, clients can be quickly ready for the new lease standard. For transition leases, which are the leases that exist on the initial application date of the new standard, they only need to collect the following information:

• Lease term, which should consider early termination and renewal provisions
• Asset details: type, description, and location
• Lease classification: If capital lease under ASC 840, then finance. Operating lease remains operating
• Discount rate, either the federal risk-free rate or your collateralized borrowing rate (FASB is considering allowing this determination by asset class)
• Lease payments after the initial application date, including termination penalties, bargain purchase options, renewal term payments, residual value guarantees
• Existing balances for this lease on the balance sheet as of the initial application date, including deferred rent and capital lease asset/liabilities

Develop a process for the accounting department to review lease data in new lease contracts:

• Key dates: commencement, termination
• Lease term, early termination, and renewal provisions
• Asset details: type, description, and location
• Payment terms, termination penalties, bargain purchase options, renewal term payments, residual value guarantees
• Lease incentives and initial direct costs

Variable lease payments tied to sales or an index receive special treatment:

• Variable payments tied to sales are expensed
• If payments are tied to an index, use the index at lease start date to calculate lease payments. Changes in the index are expensed. 
• Useful life of the asset to determine amortization period, e.g., right-of-use (ROU) asset life
• Other important data to track, such as taxable vs. nontaxable leases

Evaluate existing lease business processes

• Who is responsible? Are current resources sufficient?
• Are areas other than Accounting involved (Procurement, Legal, Treasury)?
• Is lease processing and record retention centralized or decentralized?
• Is the team ready with an easy-to-use software that provides import-ready journal entries and quantitative footnote disclosures with the push of a button?

Review new accounting and disclosure requirements, including judgment areas

• Accounting for leases created after implementation using the new standard
• Process for determining classification criteria, including the fair market value and economic life of the lease asset
• Accounting policy elections and practical expedients, including lease vs. non-lease components, short-term leases, and leasehold improvements
• Determine how ROU Assets and Lease Liabilities will be disclosed on the financial statements; separately in a footnote, or within the balance sheet and income statement itself. For new disclosures, consider data location and whether it is reliable and auditable
• How will discount rates be determined and applied by Accounting? ASC 842 provides a policy election to use a risk-free rate and is considering making this determination by asset class.

Discuss the new standard with

• The board or owners
• Investors
• The audit committee
• Lenders

Click here for a copy of this checklist you can share with clients. 

Most organizations have 20 or fewer leases, and with all of the resources including lease abstraction tools, embedded lease identifiers, checklists, guides and calculators to support your clients’ efforts, implementation is going to be easier than you think. 

When clients are ready to implement, easy-to-use and cost-effective software is available. With LeaseCrunch, now Crunchafi Lease Accounting, you can be up and running in a day, where accurate journal entries and footnote disclosures are available with the press of a button. Because spreadsheet formulas are easily corrupted and introduce risk, your audit fees may increase when your clients’ calculations have to be double checked. 

It is important to understand that most companies have straightforward leases and implementing the new lease accounting standard will not be overly difficult. Your clients shouldn’t be scared and shouldn’t push it off. As long as they utilize the tools, resources and the knowledgeable experts available, this will be manageable. We are here to help! If you are interested in learning more about LeaseCrunch, now Crunchafi, schedule a demo today.