One of the new lease accounting standards published by the Financial Accounting Standards Board (FASB) is ASC 842 (Also known as ASU 2016-02). ASC 842 includes a change in the definition of a lease and a requirement for entities to identify whether a contract includes a lease or not when it is first initiated.
Along with the requirement to identify lease contracts upon initiation, the standard requires lessees to indicate which components of these contracts are lease components and which ones are not.
How ASC 842 Affects your Business
Every business, regardless of your industry, must deal with various leases. Whether you are in real estate, manufacturing, hospitality, or even healthcare, lease contracts and tenant agreements are the norm. Traditionally, your capital lease, like the building you do business in, goes on your company balance sheet. However, operating leases, the contracts you hold between yourself and a tenant that pays rent for example, remain off balance sheets. ASC 842 now requires all operating and finance leases over 12 months, capitalized on balance sheets as a right-of-use asset to offset liability.
This new regulation prevents off-balance sheet operating leases, but increase an owner’s lease liability. Therefore, this can increase the amount of debt a company has on their balance sheets. As a result, moving these leases onto a company’s books will require accounting departments to change the way they report on operational leases that are crucial to their business. However, this change does provide more transparent accounting to investors and stakeholders. Unfortunately, many companies are not equipped to centrally manage and report on complex lease billing scenarios.
Overcoming Operational Challenges
ASC 842 implementation starts with building an inventory of all your existing leases because lease agreements can differ dramatically on a case-by-case basis. In most cases, values need to be set for every line item on a lease, including non-lease components of an arrangement. Therefore, companies will need to determine whether any transaction has potential lease implications or not. This will require a well-defined contract management process in order to gather all potential lease contracts changes and additions. An enhanced ERP (enterprise resource planning) platform, such as Microsoft Dynamics can drive new data and reporting requirements for all your legal entities.
A company needs a centralized system in place to handle lease disclosures, a plan for lease modifications, terminations, renewals, and anything else that requires an auditor signoff. These leases can have wide implications to all your legal entities regardless of where they are located, including IT, Operations, and Sales, among others. As your business grows, mergers and acquisitions may lead to multiple ledgers that will require a scalable solution to centralize information into a master record for easy lease management.
Property Lease Billing Management
Easily create and report on complex lease and billing contracts for tenant and property owner administration with Property Management (PrM) by Binary Stream. PrM gives businesses the ability to manage various leasing scenarios for all your business properties while maintaining full ASC 842 compliance. Perfect for franchises, large-scale retail, commercial and residential properties as well as most non-standard leases to track multiple leases and tenants through seamless Microsoft Dynamics accounting, reporting, and billing integration. Include lease agreement line items such as common area maintenance fees and utilities as well as other metered charges.
For more information, download our free eBook covering IFRS 16 and ASC 842.