With all the new lease accounting rules you have to contend with — whether you follow ASC 842, IFRS 16, or GASB 87 — the prospect of generating lease accounting disclosure reports can be intimidating. In this blog, we look at three simple but vital things to keep in mind as you gather lease data and think about how you will comply with the latest lease disclosure reporting requirements.
1. Lease accounting disclosure reports now require more detailed data.
The Financial Accounting Standards Board (FASB), International Accounting Standards Board (IASB), and Governmental Accounting Standards Board (GASB) created ASC 842, IFRS 16, and GASB 87 respectively with the same goal: to provide insight into an organization’s leasing activities and greater visibility into its assets and liabilities.
Where leases previously were mostly on the income statement or just a footnote, today’s lease accounting standards require those assets and liabilities to be brought onto the balance sheet — creating a far more thorough picture of an organization’s finances. Under ASC 842, IFRS 16, and GASB 87, an organization’s lease accounting disclosure reports must now provide:
- More detailed qualitative and quantitative information about leases, such as cash outflows and values of right-of-use assets
- Significant judgments made in measuring leases
- The amounts recognized in the financial statements
These new standards require you to gather a large amount of data to generate quantitative lease accounting disclosure reports related to real estate, equipment, vehicles, land, and any other leases your organization might hold.
Among other things, you will need the various inputs that are created by your amortization schedules and right-of-use (ROU) or leased asset and liability balances. You will also need access to the data points in those schedules, as well as the ability to pull out relevant values on liability and cash flows.
Lease accounting disclosure reports may also require qualitative information such as the terms and conditions of leases, assumptions used in applying the lease standards, and certain elements outside of the lease liability.
Trying to input all the pertinent lease information and track it using a spreadsheet or other manual method is no match for the kind of reporting requirements these new standards require. Thankfully, that is where lease accounting technology plays a vital role in disclosure reporting.
2. Accurate lease accounting disclosure reporting depends on software.
Lease accounting software streamlines the disclosure reporting process by providing a secure and efficient system for organizing lease data, to make sure that key information is properly compiled and disclosed.
The right lease accounting software solution helps you capture all the necessary data, track changes, and report lease costs in accordance with both your accounting policies and procedures and the latest accounting standards.
In addition, a lease accounting solution further streamlines this very complex process by providing automated calculations and workﬂows that improve lease accounting disclosure reporting in several crucial ways:
- Ensuring the accuracy of disclosure reports by providing a single-source, centralized system for inputting, storing, tracking, and managing all lease data
- Properly accounting for nuances within leases through configurable reporting and calculations, ensuring that assets are consistently accounted for
- Eliminating human error and reliance on formulas to further ensure accuracy by having all your data points and calculations already in the system
- Integrating to the balance sheet, allowing each type of lease and related information, including ROU assets, interest expenses, and liabilities, to be brought into the balance sheet
- Providing visibility into important qualitative lease details such as terms, changes and dates
Beyond achieving compliance with lease accounting disclosure reporting requirements, you can also opt for an all-in-one lease management system that combines lease accounting and administration. Such a system provides full lease accounting capabilities along with administration functions for day-to-day, ongoing lease management.
To learn more about what to look for in a lease accounting solution, read A Complete Guide to Lease Accounting.
3. Disclosure reporting requirements depend on which standards you must follow.
While ASC 842, IFRS 16, and GASB 87 differ in the types of organizations they apply to, there are some similarities in their disclosure requirements. For example, GASB 87 was created for use by state and local governments in the United States, while ASC 842 is for public and private organizations in the United States and IFRS is for international organizations.
However, across all three standards — ASC 842 disclosure reporting, IFRS 16 disclosure reporting, and GASB 87 disclosure reporting — the key requirements include the following:
- Information about the nature of an organization’s leases (including subleases)
- Leases that have not yet commenced
- Significant assumptions and judgments
- Amounts recognized in the financial statements
- Maturity analysis of liabilities
- Lease transactions with related parties
While ASC 842 makes U.S. financial reporting more consistent with the international requirements, and ASC 842 and IFRS 16 disclosure reports are very similar in format and content, there are also some important differences to keep in mind.
For example, where ASC 842 classifies leases as either operating or finance, all leases must be accounted for as finance lease under IFRS 16. In addition, ASC 842 and IFRS differ in how a short-term lease — one with a term of 12 months or less — is defined when transitioning an existing lease to the new standards.
Under ASC 842, the lease’s term is determined by the original commencement date. So, for example, a 10-year lease that has only 6 months left on it at the time of transition would still be considered a long-term lease.
However, under IFRS, an existing lease’s term is based on how much time remains when the transition occurs. Therefore, a 10-year lease with only 6 months remaining at the time of transition could be categorized as a short-term lease for purposes of disclosure reporting. Additionally, IFRS 16 provides guidance for so-called low value leases, allowing them to be grouped and treated similarly on the disclosure report.
Unlike GASB 87, where practical expedients are not optional, both ASC 842 and IFRS 16 require disclosure reporting to include which practical expedients an organization has elected to apply to its lease accounting, including:
- Practical expedients related to short-term leases
- Those related to separating lease components
- Election of transition-related practical expedients
- Election not to restate comparative periods upon adoption
With more comprehensive and complex requirements for lease accounting disclosure reporting, ASC 842, IFRS 16, and GASB 87 certainly present new challenges to accounting teams. However, with the implementation of lease accounting software and more efficient accounting practices, these new disclosure standards promise to deliver clearer, more accurate, and more useful financial statements.