As it looks like it might actually now happen, we thought it was a good time to revisit an article we wrote back in 2019, which delved into some pretty significant accounting regulation changes which could affect all mortgage banks, but especially branch heavy retail lenders.
Having recognized some major holes in ASC 840, the new leasing account standard, ASC 842 (Topic 842) was proposed by FASB and is now finally set to come into force later this year. As you are probably well aware, the date for this new leasing standard has been pushed multiple times for private and nonprofit organizations due to the COVID-19 pandemic, and other reasons. This is all coming to a head as we reach the second half of 2021. Depending on when your year ends, the effective date could be as early as January 2022.
As stated in our post back in 2019, ASC 842: How to Navigate the New Lease Changes, these changes, if not properly prepared for, will cause challenges to accounting departments as they scramble to ready in time. The biggest issues we have seen so far as our customers prepare is not so much the accounting piece itself, but the gathering of all the lease information needed to be properly organized and ready.
So what are the most crucial first steps in getting ready for ASC 842?
- Knowing what the changes are and why they are happening — This new standard is continuing with the dual classification model, but the conditions have changed in a small way. Each lease, longer than 12 months in length, must now be recorded on the balance sheet as a lease asset and a corresponding lease liability. The lease would be classified as a finance or operating lease based on certain criteria defined below. Prior to ASC 842 operating leases were not recorded on the balance sheet and expensed as incurred.
- Getting your data in good order
- Being transparent – Ensure that your leasing agreements are accurate, up to date and on hand – As I mentioned above, this is where we are seeing folks struggling a little, especially those who have acquired other companies or branches. Others record keeping standards may not be as good as yours so get started on this piece now if you haven’t already!
- Time to classify – Identify your leases into correct categories such as a Finance Lease or an Operating Lease. A Finance Lease provides the lessee an option to purchase, the lease transfers ownership at the end of the term, the present value of the sum is equal or exceeds substantially the fair value of the asset. An Operating Lease is simple: It doesn’t fall into the category of a Finance Lease.
- Work out if you would benefit from some kind of software to help or if you can manage with Excel – For many folks with a few leases, it may not make sense to invest in a tool, but for others it most definitely will whether built into your G/L or standalone. Some of these tools can be pricey, and have lots of bells and whistles, so make sure you do your research.
When you begin working through these updates, be sure to contact your auditor for any questions as they will have this information and how to best prepare for the impending changes under ASC 842. As always, Loan Vision is indeed here to help with this change should you be interested, as we do offer a Lease Management Module (check out the webinar here), but we are certainly not the only option out there.
If you aren’t doing so already, follow Loan Vision on LinkedIn and keep an eye out for upcoming webinars and information. If you are a current customer, check out our monthly Tips & Tricks & Refresher webinars designed to help you get more out of the Loan Vision system, and don’t forget to join our Loan Visionaries group on LinkedIn!
Arnold, K. (2021, July 23). ASC 842 Lease Accounting Summary, Effective Dates, & More.
EZLease. (2021, July 15). ASC 842 – Compliance, Deadlines & Handbook. https://ezlease.net/asc-842/
Pavelka, J. (2020, December 1). ASC 842: How to Navigate the New Lease Changes. Loan Vision. https://loan-vision.com/resources/blog/asc-842-how-to-navigate-the-new-lease-changes/