Just when you thought you could find your desk and start attacking your To Do list, you start receiving checklists/questionnaires from your auditors to start working on the new lease accounting standard, ASC 842. I know, you just finished up implementing the ASC 606 revenue recognition standard, and now there is another new ASC? This blog is intended to help you get started in thinking about ASC 842 and gathering some information but not to overload you with a lot details and ‘what-ifs’, at least not yet.
I don’t know about you but the big questions that come to mind first are:
- Does this affect my company, if so, how much and what changes are going to need to be made to be in compliance?
- Are the Wall Street research analysts changing their models and how are they looking at ASC 842?
Does the New Lease Accounting Standard Affect my Company?
To help with answering the first question -- There are areas of the new standard that could impact almost all entities to some degree, although lessees will likely see the most significant changes. Lessees will need to recognize virtually all of their leases on the balance sheet, by recording a right-of-use asset and lease liability.
Per the Financial Standards Board (‘FASB’):
Leases ASC 842 standard will require organizations that lease assets— referred to as “lessees”—to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. However, unlike current GAAP—which requires only capital leases to be recognized on the balance sheet— the new ASC will require both types of leases to be recognized on the balance sheet.
The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, ships, and construction and manufacturing equipment.
For public companies, the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Thus, for a calendar year company, it would be effective January 1, 2019.
For all other organizations, the ASU is effective for fiscal years beginning after December 15, 2019 and for interim periods within fiscal years beginning after December 15, 2020.
Early adopters will be permitted for all organizations.
Also, to note is that IASB has issued its new standard, IFRS 16, Leases, earlier this year. There are significant areas of divergence between guidance applicable under US-GAAP and that required by IFRS.
To help with getting an understanding in more detail on how ASC 842 impacts the different industries, please check out the article published by PwC, "The leasing standard – A comprehensive look at the new model and its impact".
How do the Wall Street Research Analysts View the New Standard?
To best answer the second question, check out FEI’s (Financial Executives International) recently published article, "Lease Accounting Faces Analyst Ambivalence" to get more information in regards to research Wall Street research analysts and their views on ASC 842.
According to FEI,
Despite the increasing drumbeat of concern regarding implementation of new lease accounting rules from financial preparers, there is palpable ambivalence from at least one major consumer of the new disclosures: Wall Street research analysts.
Stay tune for more blog posts on ASC 842 to learn more about what your peers are doing to get ready for the new standard, and be the first ones to know what companies have early adopted ASC 842, and how did they changes their financials and disclosures. Will we start seeing the SEC comment letters to these early adopters like what we saw with the Revenue Recognition Standard?