Lease accounting standard “ASC 842” became effective for most private companies beginning in 2022, and Market Street Partners has been serving as a resource for our clients with leases since that time.
The new standard means that middle-market companies that have traditionally entered into operating leases may be significantly impacted. 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 Dates
For private companies, this standard became effective for fiscal years beginning after December 15, 2021. In other words, calendar year-end companies need to implement this standard for your December 31, 2022 financial statements.
How Market Street Partners Can Help
Our team began preparing for the implementation of ASC 842 as soon as it was announced and has assisted numerous organizations through the process. We recently layered on an additional service to our lease accounting toolkit by implementing a platform called LeaseCrunch. By investing in this software, we’re ensuring the most efficient, accurate, and cost-effective solutions for our customers, while also enhancing transparency and collaboration on ASC 842 projects.
If your company needs help tackling the implementation of this new lease standard, including the 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, request a free consultation today.