ASC 842 – Leases (Accounting Standards Update No. 2016-02), issued by the Financial Accounting Standards Board (FASB) in February 2016, will take effect on January 1, 2019 for calendar-year public companies. For private entities, it is effective a year later.
While lessor accounting remains largely unchanged, lessees will be significantly affected. Most operating leases will now be capitalized on the balance sheet, leading to greater transparency of a company's leasing activities. Lessees will now be required to recognize assets and liabilities related to operating leases with lease terms of more than 12 months.
For entities with numerous operating leases, the impact is significant, especially in the retail, energy, telecommunications, transportation and airline industries.
Duff & Phelps can assist your company in implementing ASC 842, including the following:
- Extract and summarize specific lease details from lease contracts, which will be used in the calculation of lease liabilities and right-of-use assets, and in the company's determination of operating lease versus finance lease classification.
- Assist with the allocation of contract consideration in each lease agreement to lease and non-lease components identified by the company.
- Determine the fair value and economic life of the leased asset for the company's lease classification purposes, and for estimating the rate implicit in the lease, whenever that rate is readily determinable.
- Estimate the incremental borrowing rate (IBR) for each lease or portfolio of leases. The IBR can be used by the lessee if the discount rate implicit in the lease is not readily determinable.
- Develop discounted cash flow models to calculate the present value of the individual lease liabilities and right-of-use assets (including any off-market components), which will incorporate purchase and renewal options where appropriate.
Act now to:
- Understand how your balance sheet, P&L, and cash flow statement will change.
- Consider measurement alternatives depending upon the company's elected transition method.
- Evaluate the impact on leverage ratios when communicating with analysts and rating agencies.
Originally published December 6, 2018
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