ASC 842: How the New Lease Accounting Standard will Change your Business Accounting

If your business uses a lot of leases, whether leasing to other businesses or individuals or leasing items for yourself, the new ASC 842 update will change the way you account for them. Some businesses only use leases to a lesser extent as either a lessor or a lessee but others have built their entire business on the back of them. Equipment leasing and finance estimate that approximately 79% of USA businesses use some form of lease arrangement. In short, it’s entirely likely that ASC 842 will directly impact your business accounting.

ASC 842: What is the New Lease Accounting Guideline?

ASC 842 is a new accounting standard/guideline issued by the FASB (financial accounting standards board) and it, in essence, governs how companies (entities) record the financial impact of all of their lease agreements. There are a few changes to lease accounting treatment with this guideline. The main change that most businesses will notice is that if you report under US GAAP (so all USA based businesses), then ASC 842 requires you to record pretty much all of the leases to the balance sheet. Before, there were more allowable off balance sheet transactions. Of course, with leases on your balance sheet, your business will be far more transparent to those wanting to look through your accounts.

Why has ASC 842 been Rolled Out?

Accounting standard ASC 842 has been rolled out to ensure a better level of transparency for businesses in the USA. Now that the majority of leases are recorded on the balance sheet, auditors and those interested can easily and immediately get a good view of where the business is at and what kind of agreements it has in place. Some businesses might not like this, but remember, they’re all in the same boat. If you’re not too happy about your business being more transparent, the same will happen to your competitors too.

How can you and your Business Stay Compliant

To stay compliant with ASC 842 you simply have to use those guidelines when accounting for your lease arrangements. There is lease accounting software out there that can help you in your pursuit of better financial health. You can also hire an accountant who is well versed in lease accounting arrangements. It’s important to keep up to date with these accounting changes so that you and your business can pivot and adapt to the newest guidelines as quickly as possible. Usually, accounting bodies often give more than enough time to make sure you can move from one method of treatment to another.

How can you be sure to Stay Up to Date with Further Lease Accounting Changes?

Business owners are often quite busy and unable to spend too much time focusing on accounting updates. Here are some quick tips to stay in the know:

• Follow an accounting or finance website that is reputable and often posts updates.

• Speak to your accountant often and check up on whether or not things are going well.

• Keep an eye on industry body websites like FASB

• Follow accounting journals and keep an eye on the headline changes

How much you keep up to date entirely depends on the time available. Again, you usually get a good run time before the changes kick in but it’s always worth checking every now and then just to make sure you’ve got the treatment right.