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ASC 842 decoded: Private firms’ game-changing 12-month journey in review!

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TLDR:

  • The implementation of ASC 842 in 2023 marked a significant shift in accounting practices for private companies.
  • Challenges faced by private companies in implementing ASC 842 include determining lease terms and recognizing lease modifications, understanding lease commitments in acquisitions, procrastination in implementing ASC 842, and underestimating the number of leases in portfolios.

The implementation of ASC 842 in 2023 marked a significant shift in accounting practices for private companies. This new standard required the recording of most leases on the balance sheet, fundamentally changing how entities account for leases. One year after the implementation deadline, it is important to review the challenges faced by private companies and the lessons learned.

One persistent challenge in implementing ASC 842 was determining lease terms and recognizing lease modifications. Some companies struggled to identify these changes, leading to a reactive approach in accounting. To address this, companies must develop processes to proactively monitor for lease modifications and impairments, ensuring that reassessments and appropriate accounting actions are made in a timely manner. It is crucial for companies to understand when to flag potential issues in order to maintain compliance.

Another lesson learned from the implementation of ASC 842 is the importance of understanding lease commitments in acquisitions. In some cases, accounting departments were unaware of the lease obligations of acquired entities, resulting in the discovery of new leases during the implementation process. This highlights the need for a thorough review and understanding of leases during the acquisition process.

Many companies procrastinated in implementing ASC 842, which exacerbated challenges due to understaffed and underprepared accounting departments. Additionally, many companies underestimated the number of leases in their portfolio, leading to unexpected complexities. It is important for companies to avoid procrastination and to adequately assess the number of leases they have in order to properly prepare for implementation.

On a positive note, the adoption of practical expedients offered some relief in implementing ASC 842. These provisions allowed companies to simplify certain aspects of lease accounting, reducing the burden of estimation and supporting calculations. Companies widely embraced this approach, avoiding more difficult expedients.

To mitigate challenges in lease accounting under ASC 842, companies can take several steps. First, they can establish robust systems for tracking leases and lease-related events. All contracts should be funneled through the accounting department for evaluation, with internal controls in place to identify reassessment and modification triggers. Second, accounting teams should be involved early in the process of entering, modifying, or signing leases to prevent last-minute surprises and ensure timely accounting responses. Third, companies with numerous or complex leases may benefit from investing in specialized lease accounting software, which can streamline tracking, reporting, and compliance efforts. Fourth, continuous learning and refresher training are important to refresh understanding of the nuances of recording new leases and handling modifications. Companies should stay informed and consult with accounting professionals to maintain compliance with ASC 842.

In conclusion, ASC 842 is an ongoing standard that requires continuous attention and adaptation. By implementing the strategies outlined above, companies can navigate the intricacies of lease accounting more effectively and ensure continued compliance.

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