Last February, the Financial Accounting Standards Board (FASB) issued a set of new guidance for the accounting of leasing arrangements. The document, entitled Accounting Standards Codification (ASC) 842 Leases, will bring with it a host of changes to accounting and financial reporting processes across several industries going forward.
blumshapiro has prepared a series of articles on this wide-ranging subject, such as: How will new accounting standards for leases impact financial reporting, and What exactly is a lease?
As your company reviews its existing lease arrangements and prepares for the new standards to take effect, consider the following questions:
- How many potential lease agreements has the company entered into? Are we the lessor or lessee in regard to the agreements? Do we lease with related parties?
- Do our lease agreements represent single pieces of property, plant or equipment or are there multiple assets being leased through an agreement?
- Are there any subleases in relation to the existing lease agreements?
- Has control of the asset been transferred to the other party, or has the right to use of the asset been transferred as part of the agreement?
- Is the asset included in the agreement explicitly stated or implicitly stated?
- Are substantive substitution rights by lessor included in the lease agreement?
- At what dollar value (asset and liability) and lease term will the underlying asset be recorded at on the company?
- Have we as the lessee guaranteed a residual value for the asset(s) back to the lessor at the end of the lease term?
- How likely are we to extend the lease for additional periods of time? How important are these leased asset(s) to our overall operations?
- Are payments under the agreement tied to an index (example: CPI or consumer price index)?
- What is the age of the underlying asset involved in the lease agreement?
- What discount rate should be used in valuing the related lease liability recorded on the balance sheet? Do we know what our incremental borrowing rate is?
- With most leases now being required to be included on the balance sheet, does this now significantly impact the covenants related to the outstanding debt agreement of the company? Are we still in compliance with the covenants, after taking into account the new liabilities on the books as of year-end? Have we talked to the bank about this?
Having answers to these questions will help companies prepare for the new guidance, which will take effect for public entities for years starting after December 15, 2018, and for non-public entities for years starting after December 15, 2019.
If you have further questions regarding accounting for leases under Section 842 of U.S. Generally Accepted Accounting Principles, please contact Michael Young, Audit Director, BlumShapiro, at 401-330-2706 or firstname.lastname@example.org.