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Lease accounting under ASC 842
Addressing the commercial and accounting implications of leasing transactions
Most companies have recently adopted ASC 842, Leases. Under the standard, lessees are required to reflect virtually all leases on the balance sheet. The level of effort applied to comply with the standard depends on the quantity and complexity of a company's lease portfolio. Furthermore, the success of the post-implementation accounting largely depends on the level of effort applied at transition. Even seemingly straightforward lease agreements can introduce complex issues under ASC 842, but strategically approaching ASC 842 can help improve structuring, maximize synergies and manage costs.
What are the common challenges faced in transition to ASC 842, and how can companies maintain compliance go-forward?
In our experience, the common challenges faced in transition to ASC 842, included:
- Identifying and assessing embedded leases
- Quality and completeness of existing data
- Calculating Incremental Borrowing Rate (IBR)
- Quantifying operating leases on balance sheet
- Determining system versus manual process (e.g., Excel) for lease accounting
- Aligning data needs across various stakeholders
On a go-forward basis, companies should consider the following to maintain compliance:
- A streamlined approach to capture new and modified lease data
- Refresh IBR on a periodic basis
- Potential to outsource lease administration and accounting to a qualified managed service provider
- Maintain and follow a robust day 2 lease accounting playbook
- Proactively evaluate complex and judgmental lease transactions (e.g., build-to-suits, sale-leasebacks, synthetic leases, etc.)
How PwC can help
PwC is a trusted resource for helping companies navigate the accounting and financial reporting challenges of leasing. Our knowledge can help you develop strategies to withstand regulatory scrutiny, anticipate potential areas of focus in filings and meet constantly evolving expectations for clear and transparent financial reporting.
From our experience, adoption of ASC 842 took time and careful planning. Building a robust implementation roadmap early in the process was critical to an efficient and successful adoption. Management teams that were successful in adoption addressed the following four critical areas, with PwC's help:
- Evaluated completeness of lease population
- Evaluated adequacy of existing lease data
- Made appropriate transition elections and policy choices
- Evaluated potential day-2 impacts
As companies review leasing portfolios and enter into strategic lease transactions (e.g., sale-leaseback, tenant improvements, lease modifications and terminations), they should proactively evaluate the broader financial reporting implications and educate key stakeholders to achieve the desired reporting outcome.
PwC has a highly credentialed group of Deals professionals with extensive experience helping clients navigate the complexities of leasing transactions. Contact your PwC advisor or one of our Deals professionals to discuss further.
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