Lease Accounting (ASC 842 and GASB 87)

Accounting Standards Update (ASU) No. 2016-02, Leases (ASC 842) and GASB Statement No. 87 (GASB 87), change the financial reporting requirements of organizations that enter into leasing transactions or other contracts for assets such as real estate, vehicles and equipment. They will significantly affect organizations having arrangements that need to be accounted for under either of the new standards.

• 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.
• Financial reporting changes could potentially impact debt covenants, key performance indicators (KPIs), cost of capital decisions and other strategic planning efforts.
• Additional financial statement disclosures will be needed.
• Internal training, policies and procedures and new internal controls regarding application of the standard will need to be implemented.
• Significant judgments, estimates and periodic revision of estimates will be required, including testing for the potential impairment of right-of-use assets. (ASC 842)
• Documenting the judgments required to implement the standard (including practical expedients and accounting policy elections) is critical for audit preparedness. (ASC 842)
• Financial statements will be impacted with the lease-related assets, receivables, liabilities and deferred inflows of resources coming on to the statement of net position. (GASB 87)

Talk to your stakeholders

It’s important to connect with the people that need to be involved throughout the process and get their input on the effort they think your organization will need to expend.

Consult your Baker Tilly advisors

Talk with your advisors and begin to understand the process and how your organization can successfully implement accounting and systems changes for long-term success with leases accounting.

Project oversight

• Project management
• Implementation plan
• Employee training
• Policies and procedures

Adoption impact

• Lease identification and inventory
• Lease portfolio analysis
• Embedded lease analysis
• Readiness risk assessment

Lease administration software

• Lease software evaluation and selection
• Lease software implementation

Financial reporting

• Incremental Borrowing Rate (IBR) determination support
• Lease abstraction
• Transition and post-adoption journal entries
• Footnote disclosures

Post-adoption

• Financial statement impact assessment
• Outsourced lease administration
• Lease structuring advisory

Step 1: Create task force and implementation plan

• Establish/define resources to take the lead on understanding and implementing the new lease standard. Input will be needed from finance, accounting, tax, real estate, legal and technology.
• Create Task Force to oversee implementation process.
• Establish a plan and timeline for project implementation.
• Evaluate lease administration software options and determine how software can assist in managing the lease portfolio after transition to ASC 842 or GASB 87.

Step 2: Identify all leases, transition method and IBR

• Engage and train appropriate team members who will be compiling lease documents and performing lease abstracts.
• Ensure all leases have been identified.
• Confirm current lease documents and all amendments are on file.
• Decide on transition method (with or without Package of Practical Expedients as applicable).
• Gather data and prepare documentation to support the company’s determination of its IBR.

Step 3: Lease evaluation, data extraction and review

• Abstract lease data using a standard process.
• Evaluate key lease elements impacted by ASC 842 or GASB 87: lease and nonlease components (gross vs. net leases), lease terms and renewal options.
• Load lease data into lease software, including data such as lease clauses appropriate for continuing lease portfolio management.
• Review lease data to ensure it is correct, consistent and complete.
• If lease software entries will be uploaded to an accounting system, confirm lease software data feed is mapped correctly to the G/L account codes.

Step 4: Implementation

• Confirm transition method, judgments and use of practical expedients and accounting policy elections.
• Perform lease analysis  and create required journal entries.
• Verify lease entries and/or data feed are properly recorded in the financial records.
• Revise footnote disclosures as appropriate.
• Develop internal policies and procedures to address new leases, lease terminations, lease modifications and potential future impairment.
• Communicate updates to relevant stakeholders.