MLR

Simplifying the New Lease Standard for our Clients

We’re excited to announce our partnership with LeaseCrunch! LeaseCrunch’s simple, cloud-based software makes it easy to implement the new lease standards without having to worry about overcomplicated systems and inaccurate calculations.  It helps you streamline adopting ASC 842, GASB 87 & GASB 96 and offers a simple solution to accessing monthly journal entries, amortization schedules, and footnote disclosures. You’ll also have access to the system where you can add, edit, and revise your leases as necessary. We hope you like this solution as much as we do!

WHAT IS THE NEW LEASE STANDARD?

The new lease standard is intended to account for all lease obligations on financial statements, rather than excluding operating leases as has been the standard. This change ensures that a company’s financial situation is reflected as accurately as possible within the financial statements.

With the new standard, all leases must appear on the balance sheet as a Right of Use Asset and Lease Liability.

WHAT QUALIFIES AS A LEASE?

To qualify as a lease under the new standard:

  • It must be a physical asset
  • You must have the right to control or use the asset
  • The asset must be explicitly or implicitly defined

Examples include (but are not exclusive to) office rental, copiers, computers and servers, vehicles and equipment. Examples of what is typically not considered a lease under this standard are software subscriptions, leases for intangible assets, leases for exploration or use of non-renewable resources and leases of inventory or assets under construction.

Some judgment will be necessary for analyzing existing leases and implementing the new standard. The good news of a judgment-based standard is that the facts behind your contracts drive the numbers on your financial statements, rather than implementing hard line accounting rules that may not apply to every circumstance. Keep in mind that this analysis and interpretation increases the time it will take to implement the new standard, which is why you should act now.

WHAT IS THE IMPACT OF NEW LEASE STANDARD?

As you’d expect, implementing the new lease standard means you will change how you think about and account for individual leases. There are a few additional considerations to keep in mind.

DEBT COVENANTS

Changing accounting methods doesn’t change your organization, but it can affect the way your financial results are viewed by outside parties. In particular, adding significant lease liabilities can impact your compliance with debt covenants. It’s critical that you get a handle on the potential impact and start conversations with your bank as early as possible.

POLICY ELECTIONS

The new lease standard requires organizations to make policy decisions about how they will handle leases. Many of these policies make implementation easier, but often will result in a larger asset and liability on the books. Early on, your organization needs to review and decide on the policies that are right for you.

PROCESS AND CONTROLS

In most organizations, operating lease decisions are fairly decentralized, especially when multiple locations are involved. The new lease standard requires these decisions to be documented and available for accounting, which introduces a need for new systems, processes and controls. The good news is that organizations are often finding efficiencies and cost savings with this new approach.

HOW WE CAN HELP

There are many complexities to implementing the new lease standard and we are more than happy to help you with the process.

ADVICE

We are always available for questions on the process or lease standard interpretation. Implementing the standard will take some work and collaborating can ease that burden.

SYSTEMS

Given the complexity involved in capturing and controlling accurate data, calculating monthly journal entries, and creating the required footnote disclosure for financial statements, we strongly recommend seeking a software solution like LeaseCrunch to track your portfolio. Please contact us to learn more.

TEAM SUPPLEMENT

Recognizing the effort involved in implementing the new standard, we have an experienced, trained team ready and waiting to help you collect, analyze and enter lease data so you are able to implement the new lease standard in a timely manner..

NEXT STEPS: IT’S TIME TO TAKE ACTION

Download our readiness checklist today to begin preparing for implementation. It’s important to assess:

  • The size and complexity of your lease portfolio
  • The strength of your processes for leases
  • The policy elections that you will select for the new lease standard
  • The scope of your implementation process

The ML&R team is available to help and provide resources as you implement the standard within your organization. Please let us know how we can assist!

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