Navigating Lease Accounting Changes: How Businesses in Atlantic City Are Adapting to ASC 842

I've witnessed firsthand how the new lease accounting standards have transformed the way companies manage their leases. The implementation of ASC 842 (GASB 87), issued by the Financial Accounting Standards Board (FASB), has prompted many organizations to reassess their lease portfolios and accounting practices. In this article, I'll share how these changes have impacted businesses and offer advice on how you can navigate this new landscape.

Understanding the New Lease Accounting Standard

GASB 87 fundamentally changes how leases are recognized in financial statements for governmental entities. Under this standard, lessees are required to recognize a lease liability and an intangible right-to-use asset for most leases, eliminating the distinction between operating and capital leases. This change increases transparency and ensures that all lease obligations are reflected on the balance sheet. The exact standard is known as ASC 842.

In Atlantic City, where businesses often lease property or equipment from governmental agencies or engage in public-private partnerships, GASB 87 has significant implications. Companies interacting with governmental entities must understand how this standard affects their lease agreements and financial reporting.

How Businesses in Atlantic City Are Adapting

Many of my clients have taken proactive steps to comply with ASC 842. Here's what I've observed:

• Comprehensive Lease Inventory: Businesses are conducting thorough reviews of all their lease agreements, including embedded leases in service contracts.
• System Enhancements: Investing in lease accounting software that can handle complex calculations and data requirements.
• Team Training: Providing education and training for accounting and finance teams to ensure they understand and can apply the new standard.
• Stakeholder Communication: Informing lenders, investors, and other stakeholders about the changes and their potential impact on financial metrics.

According to a recent survey by PwC, nearly 75% of companies found that implementing ASC 842 required more effort than anticipated, affecting systems, processes, and internal controls.

Advice on Navigating ASC 842

If you're facing the challenges of adapting to the new lease accounting standards, here are some steps I recommend:

1. Create a Detailed Lease Inventory: Start by compiling all lease agreements. Pay special attention to identifying embedded leases within other contracts.
2. Assess the Financial Impact: Analyze how bringing leases onto the balance sheet will affect your financial statements and key ratios.
3. Upgrade Your Systems: Consider implementing specialized lease accounting software to manage the increased complexity. Automation can reduce errors and save time.
4. Train Your Staff: Ensure your team is well-versed in ASC 842 requirements. Training can help prevent misstatements and improve compliance.
5. Engage with Advisors: Work closely with your auditors or financial advisors who have experience with the new standard. Their expertise can guide you through the transition.

Key Considerations

• Internal Controls: Strengthen controls over lease data to ensure accuracy and completeness.
• Policy Updates: Review and update your accounting policies related to leases to reflect the new requirements.
• Communication: Keep open lines of communication with stakeholders to manage expectations and explain changes in financial reports.

An Example In Practice

Let me provide an example from the auto industry to illustrate the impact of ASC 842. One of my clients, an auto dealership in Atlantic City, faced significant changes in their lease accounting due to the new standard. The dealership had multiple operating leases, including property leases for showrooms, service centers, and numerous equipment leases for machinery, car covers and tools essential for vehicle maintenance. Additionally, they leased a fleet of vehicles used as loaners and rentals for customers.

Under the previous accounting rules, these operating leases were not reflected on the balance sheet, which meant that the dealership's financial statements didn't fully represent their long-term lease obligations. With the implementation of ASC 842, they were required to recognize a right-of-use asset and a corresponding lease liability for these leases. This change substantially increased their reported assets and liabilities, affecting key financial ratios such as the debt-to-equity ratio and current ratio.

To adapt to these changes, the dealership undertook several steps:

• Lease Identification and Classification: They performed a thorough review of all contracts to identify leases, including those embedded in service agreements.
• Implementing Lease Accounting Software: Recognizing the complexity, they invested in specialized software capable of handling the new recognition and measurement requirements.
• Financial Impact Analysis: The dealership assessed how the changes would affect loan covenants and engaged with lenders to renegotiate terms if necessary.
• Staff Training: Accounting personnel received training to understand the nuances of ASC 842 and how to accurately account for leases going forward.
• Policy Updates: They updated internal accounting policies and procedures to ensure ongoing compliance with the new standard.

By proactively addressing the challenges posed by ASC 842 (GASB 87), the auto dealership not only achieved compliance but also gained a clearer understanding of their lease commitments. This transparency improved their strategic decision-making regarding lease-versus-buy considerations for assets and strengthened their relationships with investors and financial institutions. Their experience underscores the importance of early planning and the benefits that can be realized through diligent implementation of the new lease accounting standards.

Conclusion

The transition to ASC 842 may seem daunting, but with careful planning and the right resources, it's manageable. Many businesses in Atlantic City have successfully navigated this change, improving their financial transparency and operational efficiency. By taking proactive steps and seeking professional guidance, you can adapt to the new lease accounting standards and position your business for continued success.