What is ASC 842?
The Financial Accounting Standards Board (FASB) has issued a new Accounting Standards Codification (ASC). This new standard will need to be adopted by all companies that have financial statements prepared in accordance with generally accepted accounting principles of the United States (GAAP). ASC 842 Accounting for Leases will now require operating leases, a contract that permits the use of an asset without transferring ownership, to be recorded on the balance sheet as an asset and a corresponding liability. Prior to ASC 842 operating leases only affected the financial statements in the form of lease/rent expense.
What is the Impact?
For many businesses this could have a significant impact on ratios used for debt compliance. We are encouraging you to reach out to the users of your financial statements, specifically lenders, to make them aware of the potential impact on the financial statements.
In some instances the user may determine this change is not helpful in assessing the financial health of business and a departure from GAAP will not have a negative impact regarding financial decisions that users make based on the financial statements. A departure from GAAP may still require an assessment to determine the quantitative effect of the departure. Additionally, users of the financial statements may change from time to time and what one user determines to be sufficient may not be for another user and adoption of ASC 842 may then be required.
How does it affect me?
ASC 842 is complex and can be cumbersome, especially the year of adoption. The new ASC will require a review of all contracts and known leases. Many contracts have embedded leases that you may not even be aware of. We have included an example of a balance sheet and corresponding ratios prior to and after adoption of ASC 842 to help you understand the potential impact. The impact for your financial statements will change based on the number of leases and terms of said leases. The example provided is the effect of only one 5-year lease.
What is the tax effect?
ASC 842 does not impact how leases are treated for federal income tax purposes.
What should I do?
We recognize this change does not impact your financial statements for the year ended December 31, 2021. However, the transition can be quite cumbersome depending on the number of operating leases you have and the number of contracts you have that will need to be reviewed for a lease component. The next twelve months will be the time to make sure it is implemented properly. We want to make this transition as smooth as possible for you and would be happy to set up a one-on-one meeting with you to discuss. We can also include any users of your financial statements if you find that would be beneficial. Please contact us to assist you in this transition.