The SBE council estimates there are around 32.6 million businesses in the USA., with 4.5 million in California alone. The fact is that the majority of those will have lease commitments. Leases help businesses operate, whether that’s leasing a place from which to do business like a storefront or an office, or if you’re leasing equipment to help increase revenue. Leasing helps affordability.
Most businesses, especially startups, can’t afford the heavy costs of buying buildings or equipment outright. However, with these leases comes a responsibility to properly account for them. Lease accounting has recently changed with the FASB ASC 842 update, also known simply as ASC 842 or just 842.
Here, we’ll take a quick look at this update and what it means for business owners.
What Is FASB ASC 842
ASC 842 is the new accounting update issued by the financial accounting standards board (FASB). All businesses reporting under GAAP must follow it when accounting for their leases. This applies to both public and private businesses. The new guidance under FASB ASC 842 dictates and compels businesses to record the vast majority of their leases to the balance sheet. There were some other smaller changes too, but for business owners in California and beyond who utilize leases, the transfer to the balance sheet is the main point and note.
Why Was ASC 842 Introduced
There’s always been a problem with valuing businesses if the lease isn’t on the balance sheet. Take two cab firms for example. The first one has leased all of its vehicles, and firm two owns them outright. Logically, firm two would be worth a lot more than firm one. However, because leases weren’t being recorded on the balance sheet it was hard to see the difference between the two firms. ASC 842 was introduced to try and enhance transparency which is why off-balance sheet activities, in terms of lease arrangements, have been reduced significantly.
What Do You Need To Do?
If you own your own business and aren’t sure what to do regarding ASC 842, you first need to speak to your accountant. Once you’ve done that you can clarify whether they’re aware and are properly accounting for your leases. If you use lease accounting software you need to make sure that it’s been updated to take ASC 842 into account. You’ll probably be fine, but it’s just worth a check. If you do your accounts yourself, you need to make sure you’re taking the balance sheet into account and properly recording your lease arrangements there
Remember, for private companies the accounting guidance went live on January 1st, 2019, whereas public companies started on December 15, 2018.
Help With FASB ASC 842
If you need help with ASC 842, any of these can probably help:
Remember, whoever you ask for help needs to be well-versed in accounting practices from a leasing perspective, otherwise, you could get the wrong advice.
To conclude, FASB ASC 842 is a new accounting standard that all lease-operating businesses must adhere to.