By Taj Adhav
With everything retailers have endured since early 2020, ASC 842 is probably the last thing on your mind. You may even see the term “ASC 842” for the first time. And it’s good
However, you may have some catching up to do.
ASC 842 is the new accounting standard released by the Financial Accounting Standards Board (FASB) that requires companies to track and more fully disclose all qualifying leased assets, including commercial real estate leases. After a one-year postponement, the standard enters into force for private companies at the end of 2021.
In short, ASC 842 requires tenants to carry most leases on the balance sheet. So instead of just having a rental charge on your income statement and then on the balance sheet as an AP amount, you will recognize both an asset and a liability measured at net present value for the entire term of the lease. .
This is a significant but important change for virtually all tenant business owners. The main reason is to make it easy for lenders, investors, buyers and sellers to compare companies’ financial statements. Complying with ASC 842 provides a much clearer financial picture of the entire lease portfolio payment obligation, rather than just showing current year rent expenses and payments.
State-owned companies were required to adopt this standard in early 2019. The FASB delayed the deadline for private companies by one year due to the pandemic, prompting many to put it on the back burner. But the wait is over. There is a lot of effort behind the scenes to get it right the first time – and getting started now is essential.
At a high level, your to-do list looks like this:
● Rental inventory: Get all your current leases in one place to be reviewed by the same team. This is a crucial step. Get inventory up front so you don’t have to go through it again when you start making entries.
● Technical evaluation: If you’re a CFO and your CPAs don’t want to do it all in a spreadsheet, look for a software platform with native ASC 842 functionality.
● Trial: Once you’ve completed your lease inventory and selected a platform, it’s important to test at least one lease. Experts recommend following a set of 25 or 30 key assumptions, working through the calculations and vice versa to ensure that the inputs and outputs are aligned.
● Coaching: Make sure that anyone who traditionally prepares and signs the lease understands all other key stakeholders who will need to review the lease for ASC 842 compliance testing. Missing this step could wreak havoc on ASC 842 compliance. so you let everyone know what you are doing, where your leases come from, how they come from and which models are up to date.
● Disclosures: Make sure that your financial statements are up to date and that you understand the footnote requirements and information recommended by your CPA.
● Adoption: Pick your business adoption date, start typing the numbers, and work them into your finances.
Preparing for ASC 842 can seem daunting. And based on SOEs that have not transitioned so smoothly, this is a valid concern. But like any big project, it’s about getting started and planning the steps. Don’t ignore the impending deadline until it’s too late. The earlier you start and the more thorough you are, the better off you’ll be.
Taj Adhav is the co-founder and CEO of Leasecake, a location management platform for tenants, landlords, and brokers who operate multiple locations with a distributed team.