In February 2016, the FASB issued ASU 2016-02 Leases (Topic ASC 842) to provide transparency and consistency in the audited financial statements of companies with lease agreements. This new standard supersedes ASC 840 and requires leases to be recorded on balance sheets for a financial statement audit. This new guidance significantly affects how public and private businesses across all industries account for and report lease agreements in their audited financial statements. Because of these critical accounting changes, companies must review 842 and comply with this standard moving forward. Read more to find out how ASC 842 will affect how you manage your audited financial statements.
What Is Considered A Lease Under ASC 842
ASC 842 defines a “lease” as a contract or element of a contract that transfers control for the right to use an identifiable asset for a specified period in exchange for payment. Assets refer to property, plant, equipment, or other tangible assets.
How does ASC 842 define the control of the asset? A business entity must direct its use and receive “substantially all” of the economic benefit from use during the specified time period in the contract.
Essential Requirements that Affect Audited Financial Statements
Before ASC 842, few leases were recorded on the balance sheet. For example, an operating lease was primarily listed on a financial statement’s footnotes as an off-balance-sheet transaction. However, the payment obligations of an operating lease are a real liability and need to be addressed clearly so that financial statements reflect this. ASC 842 differentiates between an operating and finance lease, but both are now required to be recorded on the balance sheet.
Effective Date
The guidance in ASC 842 went into effect for public entities for the annual period beginning after December 15, 2018. Due to COVID-19, the FASB delayed ASC 842 for privately held companies. Private companies are now required to adopt ASC 842 for audited financials for the reporting periods beginning after December 15, 2021. Early adoption is permitted.
How Does ASC 842 Change Your Audited Financial Statements?
Under the new guidance, most leases (except short-term leases) are required to be included on the balance sheet. Since all leases will now be reported on a company’s balance sheet as reported assets and liabilities—this can significantly change a company’s financial statements.
Ultimately, ASC 842 will require more disclosures about leases in addition to requiring reporting the related benefit and obligations on the balance sheet of audited financial statements and make it easier for investors, government agencies, business stakeholders, and vendors to see the true financial position of a company.
What You Can Do To Adopt ASC 842
Companies with a high volume of leases may face substantial complexity in implementing ASC 842. The transition to ASC 842 requires careful planning, so work with an experienced audit team.
At Assurance Dimensions, our talented professionals understand the complex rules associated with regulatory compliance. Contact us today to prepare for your future public company and private company audits.
