- Mark Dally
Contents
ASC 840 (replaced by ASC 842)
ASC 840 refers to the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 840, and provided guidelines for lessees and lessors to determine how to recognize, measure, and present leases in financial statements. It’s important to note that ASC 840 has been superseded by ASC 842 for public companies and ASC 842 or IFRS 16 for private companies.
Under ASC 840, leases were categorized as either operating leases or capital leases (also known as finance leases), each with distinct accounting treatments:
Operating Leases: Typically, operating leases were treated as off-balance-sheet arrangements. Lease expenses related to operating leases were recognized in the income statement over the lease term, and the related lease obligations were disclosed in the footnotes to the financial statements.
Capital Leases (Finance Leases): Capital leases, on the other hand, were treated as if the lessee had acquired an asset and incurred a liability. The leased asset and the corresponding lease liability were recorded on the balance sheet, and depreciation and interest expenses were recognized over the lease term.
Key considerations under ASC 840 included the determination of whether a lease met certain criteria for classification as a capital lease, such as the transfer of ownership, a bargain purchase option, or a lease term constituting a major part of the economic life of the asset.
Furthermore, ASC 840 required lessees and lessors to make various disclosures in financial statements to provide stakeholders with information about the nature and financial implications of leasing arrangements.
It is important for companies to understand historical leases accounted for under ASC 840, as this knowledge may be relevant for comparison purposes, or for certain non-public companies that have not yet adopted the new lease accounting standards (as of my last update in January ) related. . 2022. However, public companies should move to ASC 842. Please always consult the latest accounting standards and professional guidance for the latest information.
ASC 842
ASC 842 refers to the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 842, which outlines the new accounting rules and guidelines for reporting leased assets on financial statements. ASC 842 replaces the previous lease accounting standard, ASC 840, and represents a significant shift in how companies account for leases.
Under ASC 842, companies are required to recognize most leases on their balance sheets as both a right-of-use (ROU) asset and a lease liability. This is a departure from the previous practice where certain leases, known as operating leases, were off-balance-sheet. The goal of ASC 842 is to provide more transparency and a clearer representation of a company’s financial obligations related to leasing arrangements.
Key points of ASC 842 include:
Recognition on the Balance Sheet: Lessees are now required to recognize assets and liabilities for all leases with terms longer than 12 months. This includes both finance leases and operating leases.
Separation of Components: For both lessees and lessors, ASC 842 introduces a more detailed analysis of lease components. Certain components, such as variable lease payments and non-lease components, may need to be separated and accounted for differently.
Enhanced Disclosures: ASC 842 introduces additional disclosure requirements to provide financial statement users with more information about a company’s leasing activities. This includes information about the amount, timing, and uncertainty of cash flows arising from leases.
Changes for Lessors: While much of ASC 842 focuses on lessees, it also brings changes for lessors, particularly in the classification and measurement of lease receivables and sales-type leases.
Compliance with ASC 842 requires companies to reassess their lease portfolios, implement new accounting systems and processes, and provide additional disclosures in financial statements. The standard aims to improve the comparability of financial statements among entities and provide a more accurate reflection of a company’s financial position and performance.
Adopting ASC 842 may have significant implications for financial reporting, and companies are encouraged to work closely with their accounting and financial advisors to ensure a smooth transition and ongoing compliance.
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Difference between ASC 840 and ASC 842
The transition from ASC 840 to ASC 842 represents a substantial shift in lease accounting standards, particularly in how leases are recognized and reported in financial statements.
Here are some of the main differences between ASC 840 and ASC 842:
On-Balance Sheet Recognition:
ASC 840: Operating leases were generally treated as off-balance-sheet items, with lease expenses recognized in the income statement over the lease term.
ASC 842: Requires lessees to recognize most leases on the balance sheet as both a right-of-use (ROU) asset and a lease liability. This applies to both finance leases and operating leases.
Classification of Leases:
ASC 840: Distinguished between operating leases and capital leases based on criteria such as transfer of ownership, bargain purchase options, and lease term.
ASC 842: Retains the distinction between finance leases and operating leases, but the criteria for classification are modified, with a more principles-based approach.
Disclosures:
ASC 840: Required lessees and lessors to disclose certain information in the footnotes to the financial statements.
ASC 842: Introduces enhanced disclosure requirements, providing more comprehensive information about a company’s leasing activities. This includes additional details on the amount, timing, and uncertainty of cash flows arising from leases.
Separation of Components:
ASC 840: Did not explicitly require the separation of lease and non-lease components for lessees.
ASC 842: Introduces a more detailed analysis of lease components, requiring lessees to separate and account for certain components, such as variable lease payments and non-lease components.
Transition Approach:
ASC 840: No specific transition requirements as it was the existing standard.
ASC 842: Involves a transition approach with different practical expedients and options for lessees and lessors. Companies need to reassess existing leases and implement new accounting systems and processes.
Impact on Financial Ratios:
ASC 840: Operating leases kept certain liabilities off the balance sheet, potentially affecting financial ratios.
ASC 842: With most leases now on the balance sheet, there can be a significant impact on financial ratios, such as leverage and return on assets.
Costs and Implementation:
ASC 840: Generally, less complex in terms of implementation.
ASC 842: Involves more comprehensive assessments of lease portfolios, potentially requiring companies to invest in new systems and processes.
The shift from ASC 840 to ASC 842 is aimed at providing a more accurate and transparent representation of a company’s financial position and obligations related to leasing activities.
Businesses transitioning to ASC 842 should carefully consider the implications on financial reporting, disclosures, and internal processes to ensure compliance with the new standard. Consulting with accounting and financial professionals is recommended for a smooth and accurate transition.
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Up until 2021 we had been using Excel spreadsheets to calculate and manage fixed asset tax depreciation for the group's registers, which was not sustainable. To address this and to implement automation of the process, we researched solutions offered in the market, including by the large accounting firms and specialist software providers. After thoroughly vetting AssetAccountant as a vendor, testing the software and its calculations, and reviewing the company’s data security, we committed to implement the software for all tax fixed asset registers for the Whitehaven Coal group. Since implementation we have been very satisfied with the decision. The software is intuitive, robust, easy to use, and accurate. AssetAccountant’s commitment to ongoing development of the product's features has also been impressive.
Greg SinghGroup Tax Manager, Whitehaven Coal Limited
After being introduced to AssetAccountant in 2020 by PriceWaterhouseCoopers, I carefully reviewed the software's functionality to suit our complex fixed asset depreciation and lease accounting requirements. For example Buildsafe acquires, disposes and writes off thousands of assets including partial transactions. We also need flexible reporting and detailed journals. I have found the software to be enterprise standard, robust and precise. The software is a very elegant blend of beauty and smarts. The ongoing support, product development and assistance has been responsive and reliable. An amazing team and product. Thank you.
Sharon HughesCFO, Buildsafe
AssetAccountant (AA) has produced the ultimate Fixed Asset Management System. AA integrates seamlessly with Xero and produces reports that satisfies any auditor with easy to trace transactions that are verifiable. The real hidden gem is their Lease Accounting facility which takes all the heartache and time consuming issues out of AASB16.
Fantastic product - has literally saved me hours of work.
John SmithCFO & Company Secretary, Dateline Resources Ltd
We love using AssetAccountant. The time savings for every client’s depreciation entries means not only is profit increased on every job, but our additional team capacity can be directed to more valuable work. There is literally no risk in the investment of AssetAccountant fixed asset depreciation software.
Suzanne Walker Director, Clear Path Accounting
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Marco AbrilFinancial Controller, TPM Builders
It’s amazing we calculated this year’s depreciation in just a matter of minutes!
Veenith SinghGroup Finance Operations Manager, Beca Group
Our organisation was looking for a standalone cloud-based fixed asset register that could calculate depreciation for multiple companies. AssetAccountant was a perfect solution that removed the need for tracking assets and calculating depreciation through spreadsheets.The team at AssetAccountant were very responsive throughout the implementation process. The system is straightforward to use and has various options for both asset tracking and depreciation to make it suitable for most organisations.
Con KirgianisFinance Manager, KWP!
Now that AssetAccountant is in our app store, our customers and sales team have a cloud option for fixed asset depreciation which has a strong integration with QuickBooks Online.
Matt PisarskiGlobal Business Development, Intuit QuickBooks
After years of “paying a premium” for our Asset Management, we decided to go in-house. More than impressed with the ease and capability of the software, and the staff were a pleasure to deal with from go to whoa. Fabulous to have monthly reporting, as opposed to annual as well.
Kim StantonChief Financial Officer, Hardy Aviation
I have seen a lot of niche products come and go but the one constant has been the lack of a decent fixed asset register. I was recently invited to see the latest incarnation and it did not disappoint. I am confident that both accounting firms and corporate clients will be lining up to use it – I have already been extolling the solutions’ virtues.
Alan FitzGeraldFounder, Practice Connections
We initially came across AssetAccountant when researching potential replacements for the Xero asset register. AssetAccountant sparked our interest due to its ability to easily and transparently forecast depreciation, transfer assets between sites, revalue assets and asset part disposals. The AA team have been extremely helpful which has provided us with confidence in the product, we look forward to exploring additional features to find more efficiencies in our processes.
Elspeth MildrenAccountant, Lawson Grains
We highly recommend the use of AssetAccountant. Our clients benefit immensely from accurate asset register records, making spreadsheet accounting (and typical errors) a thing of the past. We can easily maintain tax and accounting registers providing our clients with accurate and meaningful information. AssetAccountant is a breeze to use, and we love that it integrates with QBO and Xero.
Leanne SpiteriFounder, Virtue Private Advisory
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