Preparing for the Updated Lease Standards
FASB recognized that organizations have been hugely impacted by COVID-19
The impact of the COVID-19 pandemic has required businesses to navigate through rapidly changing environments and regulations like never before. The Financial Accounting Standards Board (FASB) recognized the impact of COVID-19 on private businesses and organizations.
As a result, Accounting Standards Update (ASU) 2020-05, Leases (Topic 842), was released in June 2020, extending the compliance deadline for private companies and nonprofit organizations. The standard is now effective for fiscal years beginning after Dec. 15, 2021. However, despite the standard implementation being postponed by a year, now is the time to be working towards compliance and understanding of the standard so that you are fully prepared for implementation.
Summarizing ASC 842
ASC 842 was introduced in 2016 to address what was perceived to be a longstanding issue; non-balance sheet lease transactions. To comply with ASC 842, private companies and nonprofit organizations must include both lessee and lessor lease commitments as part of their balance sheet. These new balance sheet items will be recorded and entered as ‘right of use’ assets and amortized over the life of those leases. In the past, only capital leases were to be included on the balance sheet. However, under the new standard, leases must be reported regardless of whether they are classified as operating or capital. Under 842, significant changes could occur to the balance sheet and the financial ratios that may be derived from the financials. Therefore, we suggest companies assess those changes in 2021. It is important that you work with the users of your financial statements to determine their understanding of the changes and potential issues as they relate to certain items such as loan covenants and other financial statement ratio requirements.
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