Page 21 - BusinessWest March 20, 2023

Details, Details
New Accounting Standards Impact Business Leases for 2022
BY MATTHEW NASH, CPA
The implementation of the Finan- cial Accounting Standards Board’s (FASB) new lease accounting standard, ASC 842, pres- ents a major challenge for companies that produce financial statements under Generally Accepted Accounting Prin- ciples (GAAP).
After almost seven years since the release of Accounting Standards Update (ASU) 2016-02 in February 2016, these organizations must now work toward implementing ASC 842 for the 2022 fiscal year. This article will provide an overview of the key changes that need to be made in order to ensure compliance with the new lease-accounting standard.
“The overall expecta- tion is that most compa-
nies with leases will see some impact related to the adop- tion of the new standard.”
What Is ASC 842?
This standard intends to provide visibility on a company’s capital needs and obligations, improve consistency in financial-statement presentation, provide enhanced disclosures to the readers of the financial statements, and improve the comparability of lease practices across entities and industries.
Under the new standard, lessees are required to account operating leases with terms longer than 12 months on the balance sheet, result- ing in the recognition of a right-of-use asset and the corresponding liabil- ity. Under the previous standard, ASC 840, the only leases that were required to be accounted for on the balance sheet were capital leases, which are now referred to as finance leases under ASC 842. Prior to ASC 842, operating leases required disclo- sure only in the notes to the financial statements.
Lessor accounting practices remain largely unchanged from ASC 840 to 842.
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What Qualifies as a Lease Under ASC 842?
To better understand the new lease standard, you must first understand the definition of a lease. A lease is defined as the contract, or part of a contract, that conveys the right to control the use of an identified property, plant,
or equipment for a period of time in exchange for consideration.
To simplify this definition, a lease is a physical asset that a company has the right to direct the use of for economic benefit. The most common examples of leases are office space, machinery, vehicles, equipment, and land.
What Steps Should Companies Take to Prepare?
To prepare for adoption of this stan- dard, companies first need to account
Leases
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