The Financial Accounting Standards Board (FASB) released a major update (ASC 842) to its leasing accounting standards in 2016, and the new rules are now on the verge of taking effect — in January 2019 for public companies and a year later for private firms. Under the revised guidance, there is still the central distinction between capital and operating leases, but key reporting requirements have changed.
Previously, many of these operating leases had only been reported as rent expenses or in footnotes, within income and financial statements, respectively. Going forward, they’ll be identified as Right of Use Assets (ROUAs) alongside their liabilities. More than $1 trillion in leases could be recognized for the first time as a result of these FASB updates.
As we near the first big deadline for FASB implementation, progress is uneven. A 2018 PricewaterhouseCoopers survey found that one-third of public organizations thought their critical system changes wouldn’t go live in time for compliance, while a number of private companies were still only in the early stages of assessment.
The rocky transition from old to new FASB rules
Transitioning to the new standards presents significant administrative and technological challenges. Accounting teams may have to identify leases hidden in contracts, purchase orders and general ledgers, and determine whether they meet the definition of a “lease” even if not explicitly labeled as such. This task is daunting enough to have spurred some companies to hold out hope for artificial intelligence or machine learning systems capable of making these distinctions, but such solutions remain vaporware for now.
There’s also the issue of possibly needing multiple schedules for every lease — one each for payment, ROUA depreciation and liability amortization. The associated complexity raises the stakes for selecting the right technologies to manage all of the fine details: Do you try to meet the FASB requirements by working within your existing ERP system, with all of its established approval workflows and charts of accounts? Or do you start from scratch with standalone/non-integrated software?
Discover how the new Financial Accounting Standards Board (FASB) lease accounting changes will impact your organization and what you can do to minimize the burden.
The correct choice will vary from company to company based on its particular requirements. At LaSalle Solutions, we’ll listen to your needs and design a custom strategy that meets them through our combination of transparent leasing programs and centralized cloud-based tracking. With LAMP — LaSalle’s industry-leading cloud-based technology information management platform — you can keep tabs on lease schedules, maintenance contracts and much more from a single pane of glass, thereby simplifying the process of complying with FASB mandates.
Charting a smoother journey to FASB compliance
In addition to these technological and procedural approaches to the lease accounting transition, a recent official update from the FASB may ease common implementation pains. Update No. 2018-11 modifies ASC 842 with two key changes, according to the Journal of Accountancy:
- In some circumstances, lessors don’t have to separate lease and nonlease components.
- Transition provisions may be applied at the required adoption date instead of at the earliest comparative period for financial statements.
More changes are possible as the deadline approaches. LaSalle will help you keep up with the evolving requirements and craft a reliable plan of action. Reach out to our team today to get started.
Download the White Paper
Learn more about the new FASB changes and how LaSalle can help minimize their impact on your organization.