ASC 842 Adoption Challenges & Tips to Avoid

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Understanding the changes to ASC 842 and implementing the new standard for lease accounting can be quite the challenging endeavor as you strive to maneuver today’s ever-changing financial environment.

As experts in helping businesses drive successful business transformations, we’ve outlined some of the most common ASC 842 adoption challenges alongside some tips to help business leaders reduce the complexity of the process.

What is ASC 842?

ASC 842 is a standard that governs how businesses must record the financial impacts of their financial and operational lease agreements, designating that the majority of leases spanning longer than 12 months must now be reflected on the balance sheet.

This new standard for lease accounting was established to provide more visibility into liabilities resulting from leasing arrangements with a focus on reducing the number of leases not recorded on the balance sheet, also fostering more accuracy regarding financial reporting of leases that is consistent with the fundamental objectives of GAAP financial reporting.

ASC 842 became effective for public companies on January 1, 2019, and private companies on January 1, 2022.

Common ASC 842 Adoption Challenges

  1. Finding and centralizing leases under ASC 842
  2. Properly classifying and calculating leases under ASC 842
  3. Meeting ongoing auditing and risk management needs under ASC 842

Finding and centralizing leases under ASC 842

Finding and identifying all leases under ASC 842 can be very challenging and time consuming, as you’ll need to account for all leased assets including computers, telephones, vehicles, heavy equipment, warehouse space and more.

In addition, some leases will prove more difficult to find, as they may be embedded into service or usage contracts that may not have previously been considered as leasing agreements.

Depending on the number of leases you have, it can be beneficial to integrate a lease accounting management software to keep all your information centralized.

If you only have a handful of leases, a spreadsheet will work just fine – but it is important to ensure all your leasing information is accurate and accessible.

Additionally, you will need to understand the accounting guidance to ensure they are recorded correctly upon transition to the new guidance, as well as accounting for any subsequent changes resulting from modifications or impairments.

Properly classifying and calculating leases under ASC 842

Properly classifying leases requires the compilation of lease details, including the payment amounts, lease term and many other provisions, which can be difficult to achieve depending on the nature of your leases and the amount of information you have readily available.

For lessees, depending on which criteria they meet, leases must then be classified as operating or finance. Improper classification can lead to costly setbacks and errors on your financial statements that affect large-scale decision making, and while challenging, it is essential to conduct this process correctly (and do so the first time around).

For more information about lease classifications, head to our blog: ASC 842 Lease Accounting Definition & Tips for Adoption.

Conducting calculations manually can lead to errors or misstatements, and spreadsheets are often more difficult to maintain. If you have many contracts, it may be helpful to utilize a lease accounting software that can manage the implementation and maintenance of ASC 842 guidelines, facilitate ease of maintenance and reduce spreadsheet errors.

However, identifying and integrating the right software — and ensuring that you’re using it properly — can prove to be equally as challenging.

Meeting ongoing auditing and risk management needs under ASC 842

Without proper preparation and internal control development as it relates to ASC 842, changes to systems or processes can result in vulnerabilities that expose your business to risk – but understanding where and how your business will be impacted by ASC 842 is a difficult endeavor.

Especially considering that improper calculation of leases can result in a failed audit, it is essential to develop a solid risk management strategy as part of your ASC 842 adoption plan.

How to Avoid ASC 842 Adoption Challenges

The best way to avoid ASC 842 adoption challenges is to turn to a trusted partner who takes the time to understand your business needs and goals so they can develop a solid ASC 842 adoption plan that ensures as little interruption to your day-to-day operations as possible.

However, should you decide to conduct this process without outside expertise, there are some simple things every ASC 842 adoption plan must include.

What to include in your ASC 842 adoption process:

  • A roadmap for ASC 842 implementation, including a compilation of leasing information, any changes to operational processes, and where you plan to store your leasing information (via software or spreadsheet)
  • A solid understanding and documentation of the impacts ASC 842 will have on your business and a plan for developing stronger internal controls to mitigate their effects
  • A plan to review new leases on a quarterly or annual basis in order to save time down the line

Need ASC 842 Adoption Support?

Bridgepoint Consulting has helped numerous public and private companies through their ASC 842 transitions. We also have deep experience working with software companies on a wide range of technical, operations and finance initiatives.

Contact us to manage the entire transition on your behalf and handle discrete tasks like contract review, systems analysis or configuration assessments — or learn more about our risk services at the link below.