Lease Accounting (ASC 842 and GASB 87)

Accounting Standards Update (ASU) No. 2016-02, Leases (ASC 842) and GASB Statement No. 87 (GASB 87), change the financial reporting requirements of organizations that enter into leasing transactions or other contracts for assets such as real estate, vehicles and equipment. They will significantly affect organizations having arrangements that need to be accounted for under either of the new standards.

• All lease arrangements and amendments will need to be identified, inventoried and reviewed by accounting to identify the changes necessary to comply with the new standard.
• Other contractual arrangements, such as supplier arrangements and service contracts, can contain embedded lease arrangements that will also need to be identified and reviewed.
• Identifying and understanding all lease arrangements will be a cross-functional effort.
• Implementation could require new or revised lease administration software applications, policies, procedures and controls, both for accounting and operations.

• Financial reporting changes could potentially impact debt covenants, key performance indicators (KPIs), cost of capital decisions and other strategic planning efforts.
• Additional financial statement disclosures will be needed.
• Internal training, policies and procedures and new internal controls regarding application of the standard will need to be implemented.
• Significant judgments, estimates and periodic revision of estimates will be required, including testing for the potential impairment of right-of-use assets. (ASC 842)
• Documenting the judgments required to implement the standard (including practical expedients and accounting policy elections) is critical for audit preparedness. (ASC 842)
• Financial statements will be impacted with the lease-related assets, receivables, liabilities and deferred inflows of resources coming on to the statement of net position. (GASB 87)