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The Lease Accounting Standards Explained

The Lease Accounting Standards Explained

When it comes to accounting for leases, there are three important accounting standards that every company that holds leases should be aware of within their finance department. We shall consider these lease accounting standards below.

ASC 842

The ASC 842 accounting standard requires lessees to classify leases as either operating or finance leases. The difference between the two is that only single lease expenses are noted with operating leases, while with finance leases interest and amortization expenses are identified.

ASC 842 replaces the previous leasing standard of 840. It is all about closing the loopholes concerning the true impact of leases on company finances when it comes to financial reporting. The new standard requirements can be considered a more accurate way of reflecting what leases mean to a company in respect of their assets, which are shown on the balance sheet.

IFRS 16

Identified by its “I”,  the IFRS 16 accounting standard is an international accounting standard. The letters stand for International Financial Reporting Standard. It was issued in 2016 but has been effective for most companies reporting IFRS since January 2019.

The aim of IFRS 16 is about reporting faithfully information in respect of leasing transactions and providing the information for investors to make informed decisions.

GASB 87

GASB Statement No. 87 is a recent lease accounting standard that has been established. It can also be considered a financial reporting standard. The governing body responsible for issuing and enforcing it is, in full, the Governmental Accounting Standards Board, hence the initials.

This particular accounting standard applies to state as well as local governments and exists alongside the above two accounting standards. They all exist in unison to ensure greater clarity and disclosure when it comes to the reporting of leases within a set of accounts. This is required by those working with leases and investing in the lease holding companies.

Investors want assurance that the accounts they are looking at will reflect and represent leases accurately when much of a company’s business will involve them. Compliance with this greater visibility of leases on balance sheets is required by law now. The accounting standards are not optional but wholly enforceable. They are something for companies to take extremely seriously when it comes to compliance.

How Can We Better Comply with these Lease Accounting Standards?

The above three accounting standards all rely on compliance. It is no use either just complying with one of them. We therefore will look towards ways of making this multiple compliances easier for our company and our accounting staff.

The best way to manage these accounting standards will be to use accounting software that takes care of them for those working with leasing transactions. Two pieces of software that are trending right now in this area of financial accounting are EZLease and LeaseAccelerator. These pieces of software will help ensure compliance, be capable of keeping track of multiples of leasing transactions, and then of producing the comprehensive reports required for audit. We cannot underestimate the importance of software in this field of accountancy.

Leases are complex to manage for any accounts department and tools such as software will help. The new accounting standards have created a greater demand than ever for software capable of guiding everyone to the strict deadlines required by the governing bodies.

Primarily, we have three accounting standards to know about when dealing with leases: ASC 842, IFRS 16, and GASB 87. It is necessary to know about all three. There is no situation where any company just needs to know about one or two of them. All are required to be adhered to now. Even private companies have to comply with ASC 842, which previously only related to public companies.

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