2021 was a big year for lease accounting. After years of planning and postponements, this was the year where lease accounting took center stage as companies looked towards compulsory ASC 842 compliance.
ASC 842 arrives
ASC 842 fundamentally changed the way that entities relate to leases.
In the past, ASC 840 was the standard that governed leases. Leases – especially operating leases – were expensed through the income statement, and the required disclosure around such leases was relatively minimal.
Due to several high profile accounting scandals, including many that utilized leases to keep information off the balance sheet, the FASB began compiling a new standard for leases. This effort was international, which is one of the reasons that the new standard (or Topic) ASC 842, is closely related to IFRS 16.
ASC 842 instituted many changes. These included mandating a right-of-use asset and lease liability on the balance sheet, and updating the definition of what a lease actually is: “a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.”
New calculations are required, such as the present value of future lease payments, and the discount rate to use, which is the rate “implicit in the lease,” when that number is readily determinable, or otherwise the company’s incremental borrowing rate.
These changes had massive knock-on effects, and leases moved from being a peripheral issue to become a key focus for organizations.
Given that any contract could have a lease element according to ASC 842, even if this is not expressly stated within the contract – also known as an embedded lease – companies have had to re-look at all contracts and investigate whether a lease in fact exists.
Moreover, any changes in leases, or lease modifications, have to be dealt with in a very specific manner as mandated by ASC 842, and disclosure requirements have been expanded significantly.
Changes and COVID
The required implementation of lease accounting Topic ASC 842 coincided with the worst of the effects of the COVID-19 pandemic.
The FASB therefore allowed certain relief in order for businesses to be able to bear both the ongoing challenges brought about by COVID-19, and the new requirements of ASC 842.
FASB Chairman Russell Golden noted that “the FASB held a public meeting to approve measures intended to provide stakeholders with accounting relief and clarity during the COVID-19 crisis.”
Following this announcement, the FASB announced certain areas of relief, particularly when it came to concessions received by lessees and how to account for these lease modifications.
Technology becomes de jeur
Another huge trend in 2021 was the use of technology when it comes to lease accounting. With the significant changes brought about by ASC 842, accounting for leases in the same way as was done previously – often with something as basic as an Excel spreadsheet – is no longer viable.
For one or two leases, this is still an option, but once a company has more leases that they have to deal with, it quickly becomes too complex to properly manage. Excel spreadsheets will always have their place, however they are not the optimal tool to manage complex leases.
Leases are arguably the first area in accounting where a technology solution has become essential in order to comply with the various requirements and regulations.
For example, take a company that has dozens, or even hundreds of vehicle leases. Should the lease contract change in a way that requires accounting for the change as a lease modification, to manually change all those leases is almost impossible. First you have to find all the leases, then make the changes, then update the journal entries, then the disclosure. Even with standard ERP systems or accounting software in place, this can quickly spiral out of control.
With AI-powered lease automation software offered by Trullion however, your lease accounting and ASC 842 compliance becomes seamless and stress-free.
Trullion enables you to scan any type of lease, from printed copies to electronic PDFs and spreadsheets, and the AI-powered automation “reads” these documents, translating them into financial workflows, connected to the data source.
The AI automatically detects and extracts critical data, including any new, deleted or modified assets that it detects, and generates 1-click audit-ready journal entries.
Thanks to this technology, automated lease accounting software will save you and your team massive amounts of time, allow you to seamlessly meet compliance requirements, produce accurate and consolidated reports in minutes, and allow you to share a live 360° data image of the transactional workflow with key stakeholders.
2021 was big for lease accounting and 2022 is set to be bigger
Now that ASC842 has become mandatory for both public and private entities, there is no doubt going to be even more attention placed on lease accounting in 2022.
Auditors are going to focus on this key area, investors will note possible changes to key financial ratios, and accounting departments will have to decide how they’re going to deal with this critical element of financial reporting.
The good news is that with the correct tools in place, lease accounting compliance will be completely seamless, and accounting teams will be able to focus on high-value activities in 2022.
If you have any questions, or want to know more about Trullion’s AI-powered automated lease accounting software, get in touch with us.