The new leasing standard ASC 842 issued by the Financial Accounting Standards Board – FASB is one of the most significant changes in accounting in recent times. It directs to record finance and operating leases on the balance sheet. The right-of-use (ROU) asset and lease liability of all leases having terms for more than 12 months needs to be recognized on the balance sheet. The new standards have to be used by both lessees and lessors for preparing financial statements.
The main purpose of introducing the new lease standard ASC 842 is to increase the visibility of leasing obligations of an entity for the financial statement users. The existing disclosure agreement did not provide comprehensive details or a clear understanding of the leasing activities of a business. ASC 842 has addressed this issue and expanded disclosure requirements. This makes leasing activities more transparent for financial statement users.
According to new standards, the lessee or lessor should consider the level of detail necessary to satisfy the disclosure objectives. Also, useful information should be provided avoiding insignificant detail or aggregating items with different characteristics.
Therefore, businesses need to understand the disclosure requirements better before implementing new standards. If you are a business with extensive leasing activities, consider making a disclosure draft. Data gathering, collation, calculations, and additional work can make the ASC 842 implementation complex. This is where a lease accounting software can help in improving accuracy, efficiency, and maintaining the financial statements without errors and in time.
What are the disclosure requirements for lessees?
Under the new lease accounting standards of ASC 842 new qualitative and quantitative disclosure requirements are added while current disclosures are still in effect.
New Qualitative Disclosure Requirements
- Information regarding leases that have not begun but apply important rights and obligations for the lessee needs to be disclosed.
- Major assumptions and judgments considered in a contract and the related information should be disclosed. This includes the determination of lease in a contract, the discount rate for the lease, and allocation of consideration between lease and non-lease components.
- Information regarding the election of practical expedient relating to short-term leases and those related to separating lease components from non-lease components.
- Information regarding the election of transition practical expedient related to hindsight.
New Quantitative Disclosure Requirements
- Separate disclosure of expenses related to operating and finance leases are required. If the company has entered into sub-lease arrangements, the income from such arrangements should be disclosed as well.
- Cash flow and supplemental non-cash information related to lease liabilities should be disclosed.
- As per ASC 842 lease accounting standards, a lessee should calculate the weighted average remaining lease term of leases and the weighted average discount rate. This is a complex disclosure requirement under the new standards. Lease accounting software can help in calculating the disclosures accurately.
- A lease should now disclose maturity analysis of its finance lease liabilities and operating liabilities separately. This should show undiscounted cash flows every year for a minimum of each of the first five years and a total of the amounts for the remaining years.
How does Lease Accounting Software help?
To gather the data for lease disclosures is a daunting task and time-consuming too. Moreover, relevant calculations followed by validation of the accuracy of the information is always necessary and should be done regularly. Any lease modifications, additions, cancellation needs to be updated. Thus, lease accounting software can help in all aspects related to the implementation of ASC 842 standards.
You can use Yardi’s Corporate Lease Manager (CLM). The lease accounting software is modern, simple, and user-friendly. It simplifies calculations, disclosure requirements, and generate reports as per the new lease accounting standards. The built-in Lessee Accounting functionality can be used to recalculate the present value of rent payments and amortization schedules resulting from lease modifications. For more details and features, visit www.yardicorporateleasemanager.com.