August 14, 2023

Understand the Impact of ASC 842 on Your Business

Accounting and Finance

2

Minutes to read

ASC 842, issued by the Financial Accounting Standards Board (FASB) in 2016, replaced the previous lease accounting standard, ASC 840. ASC 842 requires companies to recognize all leases on their balance sheet, providing users of financial statements with a more complete picture of a company's financial position and performance.

Previously, only capital leases were recognized on the balance sheet, while operating leases were not. ASC 842 requires all leases to be recognized as a right-of-use asset and a lease liability.

"ASC 842 represents a fundamental shift in how businesses account for their lease transactions,” said Jeff Binford, Principal at Clearview Group. “Companies that fail to take ASC 842 into account risk providing users of financial statements with an incomplete and potentially misleading picture of their financial outlook."

The right-of-use asset represents the right to use the leased asset over the lease term, while the lease liability represents the present value of the future lease payments.

Many companies that have adopted the process find it difficult or have audit comments on lease value calculations. These businesses tend to seek help with the technical accounting matters and operational improvements to build greater automation and efficiency into their processes.

Why the Abrupt Change?

The changes made by ASC 842 were designed to improve transparency and comparability in financial reporting. With the new standard, all lease transactions will be reported consistently, making it easier for users of financial statements to compare companies.

How Do These Changes Affect Your Business?

Companies with a significant lease portfolio will see a substantial increase in their reported assets and liabilities due to the recognition of operating leases on the balance sheet. This may impact financial ratios and key performance indicators, such as debt-to-equity ratios and return on assets.

ASC 842 will also require companies to invest in new systems and processes to comply with the new standard. Companies must establish new accounting policies and procedures, implement new software systems to track leases, and train employees on the new requirements.

Organizations that signed a lease in 2022 must comply with ASC 842 by determining whether the lease is a capital or operating lease and recognizing the appropriate lease liability and right-of-use asset on their balance sheet.

ASC 842 represents a significant change in lease accounting for companies, aiming to improve transparency and consistency in financial reporting.

Would a Technology Partner Ease the Process?

Trullion, a Clearview partner, provides 842, 606, and other automation-enhanced tools as the “sub-ledger” of choice. The software provides ease of implementation and sophistication of capabilities.

Unlike other tools, Trullion has detailed capabilities for reporting on present value and fair value calculations for various circumstances, as well as strong workflow and audit trail capabilities.

Contact Jeff Binford for help with your compliance and process enhancement – whether with existing products, Excel-based, or an introduction to Trullion.

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