Act on leases now to avoid issues later!

While the new lease standard, Financial Accounting Standards Board (FASB) ASC Topic 842, was delayed for private companies by one year and is now effective for years beginning after Dec. 15, 2020, the delay does not mean that companies have an extra year to implement the standard. Leases that meet the criteria in the standard are required to be capitalized and reported on companies’ balances sheets for all of 2021, not just as of the year ended 2021. This is especially important for companies who have third-party financing arrangements, as lenders decidedly do not want an unexpected and material change to the balance sheet at year-end.

Why is it important to start the implementation process now? Simply stated, the standard is comprehensive and complex to interpret. It will take additional time and effort to gather the necessary information to prepare the calculations. Implementation of ASC 842 will likely be a process of learning, accumulating data, analyzing data, refining and revising. Some of the challenges companies face during implementation include:

• Compiling an inventory of leases
• Obtaining the lease agreements, including all amendments
• Determining whether contracts are considered lease arrangements, or contain a lease
• Evaluating the necessary criteria within each lease

It is imperative that companies begin the implementation process now. If your organization does not have a complete inventory of leases compiled yet, start with what you have! The implementation process can be performed in phases – tackle the simple leases first as you evaluate and compile the more difficult and complex agreements. Using this approach, you are much more likely to understand the impact on your financial statements come Jan. 1, 2021.

If you are a current Baker Tilly client, your Baker Tilly advisor will reach out in the coming weeks to begin the process of implementing the new lease standard. Our goal is to protect your organization’s value by providing you the guidance and tools to be prepared in the future.

If you are not currently working with Baker Tilly, please contact us for more information on how we can help with your organization with implementation.

For more information on the lease standard and implementation, visit our resource page.