Take Control of the New Lease Accounting Standards
After a decade of work, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have introduced changes to their Lease Accounting Standards. These new rules will change the accounting guidelines globally for most leased assets, including real estate, machinery and equipment.
Mazars anticipates these standards will have a widespread effect across industries on companies' financial planning and reporting; implementation will require experienced accounting, operational, and technological resources.
ARE YOU READY FOR ASC 842 AND IFRS 16
What are the new standards
FASB’s new Accounting Standards Codification 842 (ASC 842) will require lessees to recognize most leases on their balance sheets and provide enhanced disclosures.
ASC 842 establishes a new concept in lease accounting known as the right of use asset (“ROU”). A ROU stems from a contract which conveys the right to control an “identified asset” (e.g. property, plant, or equipment which is explicitly or implicitly defined in the contract) for a period of time, in exchange for consideration. In addition, under the terms of the contract, the customer should obtain substantially all benefit from the use of the identified asset; the supplier of the asset should not possess substantive substitution rights. ROU value is based on the present value of all future lease payments; lengthier lease terms will result in greater liabilities on the balance sheet.
ASC 842 creates a framework for classifying ROU as either a finance lease or an operating lease. Lessees must carefully consider the factors for proper classification, in order to apply the appropriate accounting treatment. Structuring lease arrangements to achieve a specific present value, or classification, may provide significant benefits. Each lease type has a different P&L effect that can impact important non-GAAP measures, such as EBITDA, which is a frequent component of debt service coverage ratios. Similarly, the computation of companies’ working capital ratios and other liquidity measures will change as a result of new lease liabilities, so this measurement effect must be managed.
With the IASB’s standard, IFRS 16, the key distinction is that all leases are accounted for in a manner similar to ASC 842 finance leases. Also, IFRS 16 allows for full retrospective transition, while ASC 842 only allows a modified retrospective transition approach.
What can you expect
Implementing ASC 842/IFRS 16 requires gathering the following information:
Inventory of leases
Terms and conditions of each lease
Lease term and scheduled payments for each lease
Initial direct costs
Classification of leases
Assessed the organizational impact aside from accounting and reporting?
Possessed timely and accurate aggregation of lease information?
Identified and implemented an appropriate IT solution?