Your auditors have been talking about it for years, and the time has finally come to implement the new lease standard. Beginning with fiscal years starting after December 15, 2021, financial statements and footnote disclosures will need to be updated to conform with the new leasing rules under ASC 842 and GASB 87.
The new standard changes the accounting treatment for operating leases lasting longer than twelve months. While this type of agreement might be included in any type of contract, most organizations will most likely see the impact in the way they account for their office or other use of space leases. You’ll want to review contracts such as office space, service contracts (they often include access to assets) and equipment leases.
What are the big impacts?
- Balance Sheet Assets – your organization will add an asset to your balance sheet to reflect that you have a long-term asset available for your use (Right of Use Asset).
- Balance Sheet Liabilities – your organization will add a liability to your balance sheet to reflect that you also have a long-term commitment to pay for the right to use the asset.
- Income Statement – As in the previous treatment of operating expenses an expense will be recorded on a straight-line basis to spread the expense evenly over the life of the lease.
- Metrics – These changes may have an impact on debt covenants, key performance indicators and planning.
How to prepare?
- Review lease agreements and identify contacts lasting more than twelve months.
- Gather the information necessary to make accounting assumptions and disclosures about the transaction, including: base rent, tenant improvement allowances, moving expenses, lease term, implicit borrowing rates, fair value of the item being leased.
- With the gathered information, talk to your accountant about to calculate the asset, liability, and straight-line rent expense.
- Talk to stakeholders that may be impacted by the change on the balance sheet. This may be banks, board members or staff who use the financial statements for organizational management, or donors.