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WHAT IS A LEASE (ASC 842)?

A contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The underlying asset must be explicitly or implicitly specified in the lease.

Core Principle of Topic 842
The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases.

FINANCE LEASE VS. OPERATING LEASE
A lease that meets any of these 5 principles-based criteria is a finance lease. Otherwise, it is an operating lease

a. Ownership of the underlying asset transfers to the lessee by end of the lease term.
b. Lease grants the lessee an option to purchase the underlying asset & the lessee is reasonably certain to exercise.
c. Lease term is for the major part of the remaining economic life of the underlying asset.
d. Present value of the sum of the lease payments exceeds substantially all the fair value of the underlying asset.
e. Underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at
the end of the lease term. (New!)

ADOPTION TIMING
ASU 2020-05 deferred the adoption of Leases (Topic 842) for non-public entities to annual periods beginning after December 15, 2021. For most clients, this will mean it’s effective for calendar year 2022. Early adoption permitted!

TRANSITION APPROACH
Entities should apply one of the following two methods:
Retrospective application to each prior reporting period presented in the financial statements with the cumulative effect of initial application recognized at the beginning of the earliest comparative period presented (subject to other transition requirements).
Retrospective application at the beginning of the period of adoption through a cumulative-effect adjustment (subject to other requirements). Under this transition method, the application date should be the beginning of the reporting period in which the entity first applies the guidance. {Modified retrospective approach}

LEASE SOFTWARE
Early adopters of the standard have said that maintaining lease data and calculations in Excel is much more complicated than initially thought. To help lessees respond to the complexities of the new standard, Aldrich provides annual subscriptions to LeaseCrunch. We can also assist with implementation for an additional fee. LeaseCrunch software provides the following capabilities and benefits:
1. Automation of all lease calculations leading to significant time savings for accounting teams and auditors
2. Journal entry reports for periodic entry to GL system
3. Financial statement disclosures
4. Lease amortization tables
5. Direct access to the cloud-based software for unlimited users
6. Unlimited storage for uploading lease documents
7. ASC 842 guidance built into the software
8. Flat subscription rate per lease, no minimums

 

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