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Accountants and business owners alike often bemoan accounting updates ― even if their intentions were to improve how to do things. They can often bring about confusion, mistakes, and frustration. Business owners who do not have their finger on the pulse could easily miss the updates, such as the new lease accounting standards, and continue to do things the old and now defunct way. Surprisingly, accountants can do this, too. It is why you need to double check your accounting for lease arrangements and make sure you are adhering to ASC 842 lease accounting standards and not still processing things under ASC 840.
Some Quick Definitions
We are going to cover some abbreviations in this article. Here is what they stand for:
Generally accepted accounting principles. It is the practice that businesses and accountants use to govern the drawing up of accounts in the USA.
The older guidance regarding lease accounting. ASC stands for accounting standards committee.
The newer guidance for lease accounting.
Financial accounting standards board. It is a private standard setting body whose purpose is to improve and in some cases establish standards for U.S GAAP.
International financial reporting standards. They are a set of accounting standards set out by the international accounting standards board
International accounting standards board.
So, now that we have covered these confusing abbreviations, what is FASB topic 842 and why is it important to you and your business?
What Is ASC 842?
ASC 842 is, simply, the name for the new lease accounting standards set out under U.S. GAAP (generally accepted accounting practice). It covers public and nonpublic companies and supersedes the old ASC 840 guidance that stood in place previously. The FASB and IASB jointly developed ASC 842. Both standards required more transparency for the stakeholders of financial statements. As such, FASB topic 842 provides management and anyone scrutinizing accounts more transparency. They can fully explore the lease arrangements on the balance sheet.
How It Will Affect Your Business
It all comes down to the balance sheet. Under the old guidelines, you could place a few items off the balance sheet. However, the new guidelines are all about increasing transparency, so the amount of allowable off balance sheet transactions reduces severely. You need to make sure you show the right leases on the balance sheet.
What You Should Do
Quite simply, you need to update your accounting practices to cater for ASC 842 if you have not already. ASC 840 is no longer the right form of accounting. Speak to your accountant, and make sure he/she is aware. This is obviously far more important if your business has occupancy with multiple leases. With that said, even if it is just one lease, you still need to account for it properly.
If you draw up your own accounts, make sure you follow these newer lease accounting guidelines to stay compliant. There is, of course, lease accounting software to help you out, or you can look at hiring an accountant.
You should also set up alerts or follow an accountancy blog so that you will know about these changes in the future with plenty of time to implement them. Although some of these changes can be frustrating, at the same time, some of them may benefit you as a business and save you money. Therefore, it is always worth keeping an eye on changes to accounting standards, such as any future lease accounting changes.
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