On November 10, 2021, the Financial Accounting Standards Board (FASB) voted unanimously to reject an additional two-year extension to the new lease accounting standard effective date for nonpublic entities. Private companies and not-for-profits must adopt the new lease accounting standard for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.
The FASB issued the new lease accounting standard ASU 2016-02, Leases (ASC 842) in 2016 but delayed the effective date for nonpublic companies due to implementation challenges and the COVID-19 pandemic. Public companies adopted the new standard for fiscal years beginning after December 15, 2018
Implementing ASC 842
With confirmation that there will be no additional delays to the effective date of ASC 842, businesses should make every effort to adopt the new reporting requirements as soon as possible.
The long-awaited changes to the lease accounting standard will require companies to record a right of use (ROU) asset and a lease liability on the balance sheet for more leasing arrangements, which will impact your financial statements and potentially your debt covenant and other calculations.
The first step in transitioning to the new standard will be to identify the complete population of leases. In addition to office, vehicle and equipment leases, you will also need to identify embedded leases in service contracts. The biggest change resulting from adoption will be to operating leases, as they will now be recorded on the balance sheet.
Be sure to discuss with your lender how the new standard will affect your financial statements. There may need to be changes made to your debt agreements based on the updated asset and liability balances.
We Can Help
Moore Colson can help your company successfully and efficiently implement the new lease accounting standard and maintain compliance following implementation. Our team has the expertise to navigate the complexities of implementation and advise you on the impact to your financial statements, debt covenant calculations and other key metrics. Contact us for more information.