Introduction to Lease Accounting

Lease accounting has changed dramatically in the past few years for publicly traded companies due to ASC 842, and now these changes are affecting privately held and nonprofit entities. Recently, members of PBO Advisory Group’s Business Advisory Services team hosted a webinar to educate businesses about these changes.

The one-hour training was an introductory overview of the basics of the new standard. Here are some key takeaways:

  1. ASC 842 requires lessees to capitalize certain “off-balance sheet” financing agreements such as long-term office and building leases.
  2. Bank loans and other agreements that require financial covenants could result in technical default due to the impact on liquidity and leverage ratios.
  3. Under the new standard, lease identification and classification are defined in ways that emphasize “substance over form.”
  4. Embedded leases and bundled arrangements present challenges in that components may need to be disaggregated and separately measured based on relative standalone pricing.
  5. For lessee arrangements, ASC 842 primarily applies to financial accounting and does not typically affect income taxes.
  6. Companies should not wait until the end of their fiscal year to address the new standard as compliance can require extensive analysis.

 
The PBO Advisory team is available to help you navigate this new standard. Whether you contact our group or another firm with expertise in financial reporting, we encourage you to consult professionals with the in-depth knowledge to accurately comply.

The topic is so extensive that our team is considering another webinar to go deeper into various aspects of the new accounting standard. Follow us on social media or sign up for our email list to stay updated.

You can also reach out to us at leases@pboadvisory.com for more information about lease accounting or contact our experienced advisors.


Josh Siler, CPA
Senior Manager, Business Advisory Services
josh@pboadvisory.com
858-935-4869

 


Scott Palka, CPA, MBA, CFA
Consulting CFO & Member
scott@pboadvisory.com
(858) 935-4847
 

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