{"id":1303,"date":"2019-04-23T13:00:13","date_gmt":"2019-04-23T20:00:13","guid":{"rendered":"https:\/\/addison.lwh.dev\/insights\/understanding-asc-842\/"},"modified":"2019-04-23T13:00:13","modified_gmt":"2019-04-23T20:00:13","slug":"understanding-asc-842","status":"publish","type":"post","link":"https:\/\/addisongroup.com\/insights\/understanding-asc-842\/","title":{"rendered":"Understanding ASC 842"},"content":{"rendered":"\n<p>ASC 842 produces a substantial overhaul of the previous accounting treatment for leases, ASC 840, with the most significant change being that most leases will now be capitalized on the balance sheet.  The goal of ASC 842 is to provide lenders and institutional investors with increased visibility into the leasing obligations of lessees.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\">Types of Classifications<\/h4>\n\n\n\n<p>Under the previous US GAAP regulation, leases were classified as either Operating Leases or Capital Leases.  While Capital Leases were recorded on the company\u2019s balance sheet, the Operating Leases were not.  The new\/current ASC 842 standard changes the types of classifications and the balance sheet treatment.  With the new standards, both classifications of leases, Finance and Operating, will be on the balance sheet.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\">ASC 842 Transition Period<\/h4>\n\n\n\n<p>The transition period for most public companies began with the accounting period starting on or after January 1st, 2019.  However, most private companies and some other entities have until 2020 to make the change.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\">\n\nUpdated Disclosure Requirements\n\n<\/h4>\n\n\n\n<p>The new regulation requires extensive disclosures to increase transparency related to revenues and expenses regarding lease contracts. Lease entities are now required to identify whether a contract contains a lease when it is initiated.  A contract is defined as a lease if it gives the lessee the right to \u201ccontrol\u201d the use of property in exchange for consideration. <\/p>\n\n\n\n<h4 class=\"wp-block-heading\"> Control exists if the lessee has: <\/h4>\n\n\n\n<ul class=\"wp-block-list\"><li>The \u201cright to obtain all of the economic benefits from use of an asset.\u201d<\/li><li><\/li><li>The \u201cright to direct the use of that asset.\u201d <\/li><\/ul>\n\n\n\n<p>This definition differs from the previous guideline, GAAP, that required the lessee to meet only the 1st requirement.  Under the new standard, it\u2019s up to the entity to determine whether it obtains the \u201cright to direct the use\u201d of the asset.<\/p>\n\n\n\n<p>A comprehensive approach to compiling data is crucial to helping auditors understand how organizations have reached their lease determinations.  Companies will need to consider details not typically thought of as leases, including outsourced warehousing, data management, or supply arrangements.  These may be subject to the new guidance and therefore require capitalization.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\">Questions<\/h4>\n\n\n\n<p>There are still some fuzzy ASC 842 details that need to be ironed out.  For example, an approach where the lessee models out its incremental borrowing rate for a standard property mortgage has been suggested.<\/p>\n\n\n\n<p>Additionally, for companies with large numbers of leases, for example a national retailer with leased stores in several locations. An approach where leases\/with similar characteristics get grouped into cohorts, and its value is calculated on a portfolio basis has been suggested.<\/p>\n\n\n\n<p>However these fixes are addressed, ASC 842 promises to make 2019 a learning experience in leasing activity. <\/p>\n\n\n\n<p>For more information about our financial and consulting services please, <a href=\"https:\/\/dlcinc.com\/how-we-work\/#we-work\">click here. <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>ASC 842 produces a substantial overhaul of the previous accounting treatment for leases, ASC 840, with the most significant change<\/p>\n","protected":false},"author":9,"featured_media":548,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[11],"tags":[],"post_function":[],"post_audience":[],"class_list":{"0":"post-1303","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-article"},"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v27.2 (Yoast SEO v27.4) - 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