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How to Apply the ASC 842 Discount Rate Update for
Private Companies and Nonprofits

By January 25, 2022Lease Accounting

The Financial Accounting Standards Board (FASB) recently issued an update to ASC 842 that addresses complexities associated with discount rate calculations. In this blog, we share how this update affects private companies and nonprofits.       

What does the discount rate update mean for private companies? 

The update to ASC 842 simplifies the way private companies, nonprofit organizations and employee benefit plans are required to determine the present value of lease payments. Under the new update, these businesses can elect risk-free rates by class of underlying asset, rather than at the entity wide level.  

This update replaces the previous rules within ASC 842 for how private companies and nonprofits handled discount rates to comply with the lease accounting standard.  

 Why was the discount rate update proposed? 

Prior to the update, companies ran into similar challenges when determining the discount rate and present value of lease payments. They had to use the rate implicit in the lease to calculate the right of use (ROU) asset and lease liability. However, the rate implicit in the lease isn’t always accessible. 

Given the difficulties private companies were experiencing, FASB recognized a need to streamline calculation guidance – and in response, proposed and issued this discount rate update.  

 How do private companies apply the new discount rate guidance? 

Organizations may now make a policy election to use a risk-free rate as the discount rate for all leases. This calculation is much easier to run, which helps businesses save time and lowers the impact on the balance sheet.  

 Are you set up to account for lease accounting guidance updates? 

The discount rate update issued by FASB to ASC 842 is just one example of why private companies and nonprofit organizations can benefit from lease accounting technology. Beyond providing lease accounting automation, ASC 842 software like Visual Lease is equipped to seamlessly adapt to changes to the lease accounting standards or a lease portfolio.  

It can also streamline your lease accounting process by automatically generating audit-ready journal entries, disclosures and reports that you need to achieve and sustain compliance.  

Additionally, the right solution will provide you with the visibility you need to thoroughly understand your lease data and use that information to make better informed operational decisions.  

Interested in learning more? See how lease accounting software like Visual Lease can help. 

 

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