By Taj Adhav
With everything retailers have endured since early 2020, ASC 842 is probably the last thing on your mind. It’s even possible you’re seeing the term “ASC 842” for the first time. And that’s o.k.
However, you might have some catching up to do.
ASC 842 is the new accounting standard published by the Financial Accounting Standards Board (FASB) that requires companies to track and more fully disclose all qualifying leased assets — including commercial real estate leases. After a one-year deferral, the standard goes into effect for private companies at the end of 2021.
In a nutshell, ASC 842 requires tenants to bring most leases onto the balance sheet. So instead of just having a rent expense on your P&L and then subsequently on the balance sheet as an AP amount, you’ll recognize both an entire asset and a liability valued at the net present value for the entire lease term.
It’s a significant but important change for practically every lessee business owner. The main reason is to allow lenders, investors, buyers, and sellers to easily compare financial statements across companies. Complying with ASC 842 provides a much clearer financial picture of the entire lease portfolio payment obligation, rather than just showing the current year rent expense and payments.
Public companies were required to adopt this standard in early 2019. FASB delayed the deadline for private companies by one year because of the pandemic, which caused many people to push it to the back burner. But the waiting is over. There’s a lot of effort behind the scenes to get this right the first time — and it’s essential to start now.
At a high level, your task list looks like this:
● Lease inventory: Get all your current leases in the same place to be reviewed by the same team. This is a crucial step. Get the inventory right up front so you won’t have to revisit it when you start making entries.
● Tech assessment: If you’re a CFO and your CPAs don’t want to do all this in a spreadsheet, then look for a software platform with native ASC 842 functionality.
● Testing: Once you’ve completed your lease inventory and selected a platform, it’s important to test at least one lease. Experts recommend following a set of 25 or 30 key assumptions, working through the calculations and back again to ensure inputs and outputs are aligned.
● Training: Make sure anyone who traditionally prepares and signs the lease includes all the other key stakeholders that will need to review the lease for ASC 842 compliance testing. Missing this step could wreak havoc when it comes to ASC 842 compliance. So please make sure everyone knows what you’re doing, where your leases come from, how they originate, and which templates are current.
● Disclosures: Make sure your financials are up to date and that you have an understanding of the footnote requirements and disclosures as recommended by your CPA.
● Adoption: Choose the adoption date for your company, and start plugging in the numbers and get them into your financials.
Preparing for ASC 842 might seem daunting. And based on the public companies that didn’t transition so smoothly — that’s a valid concern. But like any big project, it’s all about getting started and planning out the steps. Just don’t ignore the looming deadline until it’s too late. The sooner you start and the more thorough you are, the better off you’ll be.
Taj Adhav is co-founder and CEO at Leasecake, a location-management platform for tenants, landlords, and brokers who operate multiple locations with a distributed team.