In 2016, FASB released Update No. 2016-02 Leases (ASB Topic 842), which significantly changed the way that lessees accounted for operating leases. Prior to the issuance of ASB Topic 842, lessees were not required to include assets and liabilities on their balance sheet. Now, nonpublic entities, including most nonprofit entities, must disclose this information.
The COVID-19 pandemic has had a significant impact on nonprofit organizations and other businesses globally. The changes to the timeline for implementing ASB 842 will help to ease the reporting burden of the lease accounting standards on these organizations as they navigate the fallout of the pandemic.
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When Must Nonprofit Entities Be Required to Comply with ASB 842?
The original deadline related to coming into compliance with ASB 842 was for fiscal years ending after December 15, 2019. This deadline was extended through fiscal years ending after December 15, 2020.
Recent guidance, however, has extended the deadline once again. Nonprofit entities must now comply with the guidance of ASB Topic 842 for fiscal years beginning after December 15, 2021.
What Are Operating Leases?
According to ASB Topic 842, operating leases will now be required to be included on the balance sheet. Leases which do not meet the following requirements are considered to be operating leases:
Compliance with ASB Topic 842
The new guidance will require the lessee to calculate the value of the lease liability as the present value of the lease payments that have yet to be made in the initial period of the lease.
For all subsequent periods, the liability for the lease payments is reduced and the interest portion of the payments is accounted for as rent expense.
Properly planning for the changes will be essential given the complexity involved in accounting for the new standard.
Here are some tips to help make the process go more smoothly:
Determine Your Current Lease Holdings
The first step in determining your plan is to compile a listing of all your operating leases. While the traditional types of leases, such as those for property, plant, and equipment, may be obvious, there are those that may not be as obvious.
Work with other departments such as information technology (IT), finance and others to determine whether there are leases that may have been overlooked.
Determine Your Technology Needs
How will you keep track of your leases going forward? Does your current software meet your needs? Will your current accounting system allow you to properly capture the new lease requirements?
Some additional questions to consider include:
- How substantial is your leasing activity? How significantly will your processes change to account for this activity?
- How will new leases be identified?
- What is the process for notification of lease renewals?
- Where will lease contracts be maintained?
You will want to create a plan for updating your technology as necessary and work to create a process to centralize the maintenance of lease contracts for more efficient tracking.
Create an Implementation Plan
Work with your team to create a plan to implement the new guidance. Depending on your circumstances, this may include the ability to make certain elections that will help make the setup process easier. You will want to consult with your financial advisor to help you determine your eligibility for any elections.
Your financial advisor may also assist you in determining the best method for applying the new standard, either solely in the period of adoption or for all comparative periods presented. Your implementation plan will vary significantly depending on the method you choose.
Educate Your Team
This new guidance is likely to have a far-reaching impact outside the accounting department. Work with other team members to help them understand how the new leasing guidance will impact both them and the organization. Educate them on how the new lease requirements might change how they do their jobs to help generate team buy-in and make the process run more efficiently overall.
The new guidance in accounting for operating leases is complex. You will want to prepare ahead of time in order to address any obstacles, prepare any elections and ensure that your organization is ready to comply with the rules moving forward.
If you would like to learn more about rules surrounding ASB Topic 842 or how to implement the new guidance going forward, please contact one of our Nonprofit experts.
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