The Financial Accounting Standards Board's (FASB) new lease accounting standard (ASC 842) has already been implemented by public companies. Due to the challenges surrounding the COVID-19 pandemic, private companies were granted an extension. Private companies are now required to implement the new lease standard for fiscal years beginning after December 15, 2021. For companies with a December 31 year-end, the new lease standard will need to be implemented effective January 1, 2022.

What can you do to prepare? Below are four steps to help ease the transition to the new lease standard for private companies.

1. Identify all leases and gather supporting documents.
2. Determine adoption method and policy elections.
3. Estimate the impact of the new lease standard on your financials.
4. Consider the impact of changes on bank requirements.

Due to the complexity of the new lease standard, today we will dive deeper into step 2. In addition, the guidance provided will be focused on the impact to lessees rather than lessors.

Determine adoption method and policy elections

Adoption Method

Company management will need to determine which adoption method to elect in order to properly present the comparative financials during the year of implementation. The modified retrospective transition approach allows management to present the comparative financials in either of the following manners:

1. With both years restated under ASC 842
2. With only the current year recorded under ASC 842 and a cumulative-effect adjustment to beginning equity ("Comparatives Under 840 Option")

Policy Elections

Once your company selects your adoption method, there are additional policy elections that you will need to make. Management of private companies can make the following elections in order to ease the implementation of the new standard:

1. To not record a lease asset and liability for contracts with terms of 12 months or less
2. To not separate lease and non-lease components of a contract
3. To use the risk-free rate when discounting the lease payments

Also, it is important to note that the new lease standard does not need to be applied to leases for which the adoption would have an immaterial impact on the financial statements. Be sure to discuss this with your company's auditors or accountants before finalizing your materiality threshold.

Practical Expedients

In addition to the policy elections above, private companies also have the option to adopt a variety of practical expedients in order to further ease the implementation process. These include:

1. A "package" of practical expedients to not reassess existing contracts for whether they are or contain a lease, lease classification, or initial direct costs
2. An expedient to allow Management to use hindsight to determine if lease payments and purchase options should be included in determining the value of the right of use asset
3. An expedient to not reassess certain land easements

It is important to remember that once these policy elections and practical expedients are selected, they must be applied consistently to all leases held by the Company.

When implementing the new lease standard, there are many important decisions to make! If you have any questions on the new lease standard and how each of these decisions may impact you and your business, please contact our team today.

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