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Episode 2 “ASC 842: Why you need to act now”

By July 23, 2022VLDI Podcast

ASC 842 is here – it’s time to take action. In this episode, our host, Joe Fitzgerald, breaks down how to get your business up to speed on the standard and prepared for some of the challenges you may face.  

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VLDI Podcast Episode 2 Transcript

Joe: 

Hi there, Joe Fitzgerald here, your host of Tthe VLDI Podcast.  

I have been in the accounting profession for many years, both as a CPA at a global accounting firm, as well as a senior finance executive in industry. During my career, one of the most impactful changes to accounting that I have experienced firsthand is adopting the new lease accounting standard, ASC 842. 

Most publicly traded companies transitioned to the new lease accounting standard back in 2019 so while they have effectively had three years of reporting under their belts, it is still very much here and now for private companies.  

Having had a front row seat when public companies adopted the standard, we thought it might be helpful to those companies that have yet to adopt it to share insights of lessons learned and best practices. 

ASC 842 is not just another end of the year footnote disclosure.  

This is an entirely new approach to accounting for leases, and companies need to realize that much of the work that goes into compliance happens outside of the technology implementation — namely, centralizing your lease contracts and abstracting the data they contain, as well as establishing the proper accounting policies and procedures. 

So, you’re probably thinking: what’s the most efficient way for a business to get up to speed on ASC 842? 

Well, I’ve found that the folks who are responsible for the standard, namely the finance folks, need to do a really good job at socializing and educating across the organization to all the other cross-functional people who are going to be involved in helping them implement the standard.  

Most companies don’t have a good handle on how many leases they have because there is not really a single owner or system of record to store them. 

Yes, achieving lease accounting compliance starts with Day 1, by bringing all your leases onto the balance sheet in the form of a right of use asset and related lease liability, but it doesn’t end there. 

It’s also about tracking and accounting for every change made to each lease throughout the period you are reporting on. 

If you don’t have the tools in place to record adjustments to your leases, you will face significant challenges when it comes time to produce the journal entries to record those changes and the relevant disclosures. 

Some of the potential risks include, quite honestly, the simple one is, the lack of accuracy. Or just getting the journal entries wrong because you didn’t have the proper process and systems in place to make sure you got your calculations correct.  

If your organization only has a few leases, that’s one thing. But what if you have dozens, or hundreds, or even thousands like many of our customers do? That becomes another problem entirely. 

For example, if your company has a December 31st year end, you need to be able to book an opening journal entry on January 1, 2022, for all of your company’s leases that are active as of December 31, 2021. 

You heard me right. Now that we are well into 2022, you still need to be able to record an opening balance Right-of-Use Lease Asset and related Lease Liability as of January 1, 2022. 

The longer you wait, the trickier this can become, as you may find yourself having to recast many of your lease accounting entries that have occurred so far this year to get back to that opening balance. 

So don’t delay and risk being flagged for a deficiency during your next audit. I hope these insights were helpful, see you on the next episode! 

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