As of January 1, 2022, the new lease accounting standard (ASC 842) has arrived for calendar year-end private companies.
While previously, a balance sheet did not include payment obligations of operating leases, (making future debts nearly impossible to identify), under ASC 842 all lease obligations must appear on the balance sheet as a right-of-use (ROU) asset and lease liability.
What other issues must you keep an eye on when it comes to ASC 842?
- Lease definition – ASC 842 includes a new lease definition: “A contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.” This definition specifies four main lease characteristics: an identified asset, the right to control the use of that asset, a set period, and consideration.
- Embedded leases – Under ASC 842, all leases create a lease liability and ROU asset on the balance sheet. Look carefully at all service agreements and contracts to determine if they contain an embedded lease. If they do, you’ll need to account for the lease according to the new standard.
- Lease term – ASC 842 focuses on the contractually enforceable terms and conditions of the lease. The “lease term” refers to the time when the contract can be enforced, and the lessee can utilize the asset.
The FASB frequently issues new standards that can impact your business’s financial reporting. Having an established relationship with a proactive tax advisor allows you to focus on your business instead of the ever-evolving intricacies of accounting standards. Contact Dembo Jones today to start that relationship and take advantage of the benefits of having a trusted financial partner looking out for you and your business.