One of the new lease accounting standards published by the Financial Accounting Standards Board (FASB) is ASC 842 (Also known as ASU 2016-02). ASC 842 includes a change in the definition of a lease and a requirement for entities to identify whether a contract includes a lease or not when it is first initiated. Along with the requirement to identify lease contracts upon initiation, the standard requires lessees to indicate which components of these contracts are lease components and which ones are not.
The FASB's international counterpart, the IASB, also issued a new lease accounting requirement, the IFRS 16 which slightly differs from ASC 842.
How ASC 842 & IFRS 16 Affect your Business
Every business, regardless of your industry, must deal with various leases. Whether you are in real estate, manufacturing, hospitality, or even healthcare, lease contracts and tenant agreements are the norm. Traditionally, your capital lease, like the building you do business in, goes on your company balance sheet. However, operating leases, the contracts you hold between yourself and a tenant that pays rent for example, remain off balance sheets. ASC 842 now requires all operating and finance leases over 12 months, capitalized on balance sheets as a right-of-use asset to offset liability.
This new regulation prevents off-balance sheet operating leases, but increase an owner’s lease liability. Therefore, this can increase the amount of debt a company has on their balance sheets. As a result, moving these leases onto a company’s books will require accounting departments to change the way they report on operational leases that are crucial to their business. However, this change does provide more transparent accounting to investors and stakeholders. Unfortunately, many companies are not equipped to centrally manage and report on complex lease billing scenarios.
Unlike US GAAP standard, IFRS 16 permits lessees to apply a recognition exemption for leases of less valuable assets (ones with a value lower than or equal to $5,000 when new). If lessees do choose to recognize a lease, they can only apply a single accounting model on their balance sheet.
Under IFRS 16, lessees are required to recognize whether a contract is a lease or contains lease
components at its inception – similar to ASC 842’s requirement. While this is straightforward in many cases, it may necessitate that lessee entities dedicate more time and effort to their lease definition process or that they implement an improved accounting software to aid their compliance efforts.
Overcoming Operational Challenges
Complying with ASC 842 and IFRS 16 requires more than capturing data in a structured an consolidated system. For companies affected by the two new standards, having the ability to eliminate manual processing becomes exponentially more beneficial with each lease contract they sign; and having an accounting system with the ability to handle this becomes a necessity.
Since an enterprise resource planning system such as Microsoft Dynamics GP, Dynamics 365 Business Central, and Dynamics 365 for Finance and Operations needs to address more than a company’s lease specific needs, they tend to have minimal support for lease processing automation and compliance enablement out of the box. This is where extensions like Binary Stream’s Property Management (PrM) solution present an unmatched value.
Property Lease Billing Management
PrM enables multiple leases and subleases management, and streamlines complex contracts and by employing innovative lease-creation wizards to eliminate the potential for human error and
repetitive tasks. Aside from the lease processing and administration, PrM also excels at building detailed vacancy and delinquency reports, rent roll reports, and lease summary reports that help companies improve their analysis and forecasting leading to better business decisions.
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