Temporary Reprieves
In 2019 , the FASB deferred Accounting Standards Update ( ASU ) No . 2016-02 , Leases ( Topic 842 ), to 2021 for private entities . Then , in 2020 , the FASB granted another extension to the effective date of the updated leases standard for private firms , because of disruptions to normal business operations during the COVID-19 pandemic .
Currently , the changes for private entities will apply to annual reporting periods beginning after Dec . 15 , 2021 , and to interim periods within fiscal years beginning after Dec . 15 , 2022 . Early adoption is also permitted .
Most private organizations have welcomed these deferrals . Implementing the requisite changes to your organization ’ s accounting practices and systems can be time-consuming and costly , depending on its size , as well as the nature and volume of its leasing arrangements .
Changing Rules
The accounting rules that currently apply to private entities require them to record lease obligations on their balance sheets only if the arrangements are considered financing transactions . Few arrangements are recorded , because accounting rules give lessees leeway to arrange the agreements in a way that they can be treated as simple rentals for financial reporting purposes . If an obligation isn ’ t recorded on a balance sheet , it makes a business look like it is less leveraged than it really is . be readily apparent , for example , if they ’ re embedded in service contracts or contracts with third-party manufacturers .
Act Now
You can ’ t afford to wait until year-end to adopt the updated guidance for long-term leases . Many public companies found the implementation process took significantly more time and effort than expected .
Doeren Mayhew ’ s CPAs and advisors can help evaluate which of your contracts must be reported as lease obligations under the new rules . Taking it a step further , our partnership with LeaseCrunch allows us to offer a quick solution where you can simply enter your lease information into a system to generate journal entries , amortization schedules and footnote disclosures . Contact us today to get started before you run out of time . ■
The updated guidance calls for major changes to current accounting practices for leases with terms of a year or longer . In a nutshell , ASU 2016-02 requires lessees to recognize on their balance sheets the assets and liabilities associated with all long-term rentals of machines , equipment , vehicles and real estate . The updated guidance also requires additional disclosures about the amount , timing and uncertainty of cash flows related to leases .
Most existing arrangements that are currently reported as leases will continue to be reported as leases under the updated guidance . In addition , the new definition is expected to encompass many more types of arrangements that aren ’ t reported as leases under current practice . Some of these arrangements may not
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