A new accounting standard (“ASC 842”) is effective for most private companies beginning in 2022 and Market Street Partners wants to be a resource for you. All leases greater than 12 months will now be recorded on the balance sheet (previously, only capital leases were recorded on a company’s balance sheet). Middle market companies that have traditionally entered into operating leases could be significantly affected by the new lease accounting standard. For example, if a company has a debt covenant based on its debt-to-equity ratio, its ability to satisfy that covenant after implementing ASC 842 could be seriously compromised. We recommend that companies evaluate this standard’s impact on their business and create an implementation plan with their trusted advisors to eliminate any surprises.
Highlights of the New Standard
Implementing ASC 842 results in lessees classifying their leases as either financing (formerly referred to as capital) or operating leases.
The new standard requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. Adding these assets and liabilities to the balance sheet could significantly affect the financial ratios a company uses for various reporting purposes.
The standard requires implementation of a right-of-use model for all leases with terms longer than 12 months.
Expanded disclosure requirements around the company’s leasing arrangements.
Finance lease treatment (formerly known as capital leases) remains largely unchanged from the previous standard.
Lessor accounting treatment remains largely unchanged from the previous standard.
Effective Date
For private companies, this standard is effective for fiscal years beginning after December 15, 2021. In other words, for calendar year end companies, you will need to implement this standard for your December 31, 2022 financial statements.
However, it is important to note that if your company presents comparative financial statements (current year and prior year), you will need to make the necessary adjustments for the year ended December 31, 2021.
How Market Street Partners Can Help
Our professionals are on deck and ready to help you and your company tackle the implementation of this new lease standard, including calculation of initial journal entries, calculation of monthly journal entries after the initial entry, and compliance with required disclosures to be in accordance with US GAAP.
Ready to schedule your free consultation? Just click the chat bubble in the bottom right corner of this window or email Derek.Daniel@marketstreet.partners.