Let us consider just what ASC 842 lease accounting is and what it might mean to your leasing business. It happened because of the Enron fallout and is important to learn about. It affects how we record things financially.
What is ASC 842?
ASC 842 is a new lease accounting standard from the FASB (Financial Accounting Standards Board). It concerns public companies from 2019, and private ones from 2020, which are then also required to adopt it. ASC 842 involves the tracking and disclosure of all the assets a company is leasing out to others. The accounting standard replaces the US GAAP, ASC 840 standard that was previously in existence.
What Does ASC 842 Mean for Companies?
The standard is about companies recognising most of their assets or liabilities as leases. This is whether they be classified as either operating or finance leases. There are significant reporting considerations to make for both lessor and lessee in recognising more ASC 842 governed assets and liabilities in terms of leasing. The changes made with the new accounting standard have to be considered to keep within the rules.
Lease accounting is affected by this new accountancy standard and, as such, requires extra knowledge to manage. So, not only are computer input and software skills required, a capacity to learn, understand, and interpret the different and changing accounting standards is also necessary for compliance.
More Information on How ASC 842 Came About
As mentioned above, it was the Enron fallout that meant ASC 842 happened and was necessary. The fact was that Enron was a far riskier company than its published financial statement displayed in 2021. This was discovered as being about its significant use of leases that were unreported. Under the old leasing regulations related to disclosure (FAS 13 / ASC 840), it was only necessary for capital leases to go on the balance sheet but no others. It was when Enron went into bankruptcy that the problems resulted. Shareholders would lose more than $11 billion and this could not be overlooked. The ripples from it resulted in the Sarbanes-Oxley Act of 2002 which would be able to improve public company disclosures and mean that their executives would be held more accountable for their decisions and actions.
In conclusion, ASC 842 is about everybody’s protection. The fact is that financial statements need to accurately reflect the solvency of a company, and assets that are leased will all come into play should that company hit hard times. It does mean more to consider and disclose for the companies themselves but this does at least give investors some confidence and ultimately bring more investment to leasing companies. Nobody is going to invest their hard-earned cash without knowing all there is to know about a company. Certainly not after what happened to Enron. So, openness is the order of the day, and accounting standards force everyone to comply where they might not have done otherwise.
In terms of making things easier regarding managing these accountancy standards that are always subject to change, we have accounting software systems with a whole manner of tools to assist us. Also, usually, the software will be supplied with assistance that we can turn to which will help us and our staff use it effectively. This is a helpline to a customer services operative. We can then be guided through the computer processes that are troubling us. We can either then relay this advice to other staff who might be struggling in the same way or have them contact the help desk themselves. It is far easier to understand something that you are being talked through while on a computer screen than trying to do it afterwards from notes or just from notes in the first place. The backup services with regards to lease accounting software are a great help to companies.