It takes time to implement new accounting policies and procedures and supporting controls and systems. Below is a select list of new accounting standard updates (“ASU” or “Update”) effective for nonpublic entities in calendar year 2022.
Warning… accounting complexities may prove challenging! Now is the time to evaluate the implications these may have on your financial reporting framework.
Click below on any of the topics not covered in this article to read our individual blogs.
- ASU 2016-02 Leases (Topic 842)
- ASU 2019-12 Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes
- ASU 2020-01 Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815 (A Consensus of the Emerging Issues Task Force)
- ASU 2021-07 Stock Compensation – Stock Compensation (Topic 718) Determining the Current Price of an Underlying Share for Equity-Classified Share-Based Awards (A Consensus of the Private Company Council)
Below is a summary of the first of the four Updates noted above.
ASU 2016-02 Leases (Topic 842) (“ASU 2016-02”):
Public companies have had to comply with Accounting Standards Codification (“ASC” or “Codification”) 842, Leases, since the beginning of 2019, and now that deadline is here for private companies.
Most significantly, ASU 2016-02 results in a lessee recognizing most leases on the balance sheet as a lease liability and for the lessor, aligns profit recognition provisions with that of the contract-based principles of the new revenue recognition standard, ASC 606, Revenue from Contracts with Customers.
A lessee may elect to adopt an accounting policy which eliminates having to record a lease liability for leases with terms of 12 months or less, depending on renewal options and likelihood of renewal. For those leases for which a lease liability is recorded, the offsetting entry recognizes a right-of-use (“ROU”) asset. The ROU asset is measured based on the present value of future lease payments. While both operating and finance leases are recognized on the balance sheet, the accounting for the related expense differs. For operating leases, lease expense is recognized on a straight-line basis over the term of the lease. For finance leases, however, the lessee recognizes both interest expense and amortization expense.
A lessor must classify leases as sales-type, direct financing or operating leases. Depending on the classification, income recognition may differ. ASU 2016-02 requires a lessor to identify at the time a contract is initiated with the customer whether such contract contains a lease. Per ASU 2016-02, a contract is considered to contain a lease if it provides the customer the right to control “… (1) the right to obtain substantially all of the economic benefits from use of an asset. (2) the right to direct the use of that asset.”
Note that the Financial Accounting Standards Board (“FASB”) has released amendments to ASC 842, including practical expedients. ASU 2016-02, also significantly increases disclosure requirements for both the lessee and lessor. Many companies are having to implement new accounting policies and procedures, as well as software solutions, to properly implement the new standard.
Please refer to the Codification in its entirety for the complete guidance and a full understanding of the implications. The adoption of a new accounting standard can consume a significant amount of a company’s valuable time and resources. Sarbey, Lexow & Kaufman’s Audit & Assurance professionals are available to assist your organization in navigating and implementing these, as well as all other accounting standards. Please contact us at [email protected] so we may assist you with specific advice and/or implementation support.
Stay tuned for subsequent postings which will summarize the significant aspects of ASU 2019-12, ASU 2020-01 and ASU 2021-07.
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