What are the lease standard changes?
ASU No. 2016-02, Leases (Topic 842), changes the financial reporting requirements of companies that enter into leasing transactions for assets such as real estate, vehicles and equipment. It will significantly affect organizations having arrangements that need to be accounted for under the new standard.
- All lease arrangements and amendments will need to be identified, inventoried and reviewed by accounting to identify the changes necessary to comply with the new standard.
- Other contractual arrangements, such as supplier arrangements and service contracts, can contain embedded lease arrangements that will also need to be identified and reviewed.
- Identifying and understanding all lease arrangements will be a cross-functional effort.
- Implementation could require new or revised lease administration software applications, policies, procedures and controls, both for accounting and operations.
- Significant judgments, estimates and periodic revision of estimates will be required, including testing for the potential impairment of right-of-use assets.
- Documenting the judgments required to implement the standard (including practical expedients and accounting policy elections) is critical for audit preparedness.
- Financial reporting changes could potentially impact debt covenants, key performance indicators (KPIs), cost of capital decisions and other strategic planning efforts.