In February of 2016, the Financial Accounting Standards Board proposed a new lease accounting standard known as ASC 842. After delays for non-public companies partly due to COVID-19, the lease accounting standard effective date has now passed for every type of business entity that follows GAAP, meaning all organizations must recognize lease assets and liabilities, differentiate between operating and finance leases, and update disclosure requirements on financial statements. 

Although the lease accounting standard effective date has passed, LeaseCrunch can still help you save time and automate everything included in these new lease accounting standards. First, let’s look at the ASC 842 effective date and when the new lease accounting standards went into effect for different organizations.

ASC 842 Effective Date

The lease accounting standard effective date refers to the date when a new accounting standard, policy, or procedure is implemented and begins to be used in financial reporting. When a new accounting standard is issued by FASB or another standard-setting body, it is usually accompanied by a specific effective date. 

The lease accounting standard effective date is the earliest ASC 842 adoption date in which organizations must apply the new lease accounting standards to their financial statements. Due to COVID-19, the ASC 842 effective date changed for organizations depending on  their type of organization. Here are the effective dates of ASC 842 for each type of organization:

ASC 842 Effective Date for Public Entities

The ASC 842 effective date for public entities is the fiscal year starting after December 15, 2018. This date is also the effective date for all organizations following IFRS standards, not-for-profit organizations with conduit bonds that are openly traded, and employee benefit plans that file financial statements with the SEC.

ASC 842 Effective Date for Public Non-profits

The ASC 842 effective date for public non-profits is the fiscal year starting after December 15, 2020. 

ASC 842 Effective Date for Private Companies and Non-profit Organizations

The ASC 842 effective date for private companies and non-profit organizations is the fiscal year starting after December 15, 2021. 

Initial Application Date

The initial application date refers to the date when a new accounting standard is first applied in financial reporting and is the starting point for using new guidance in financial statements.

This means that when an accounting standard becomes effective, the organization should generally apply the standard to the earliest period presented in the financial statements. Fortunately, the new lease accounting standard allows an organization to choose whether to restate prior periods or to adopt the lease accounting standard for the most recent year presented. Here are some examples of how the initial application date works with the new lease accounting standard effective date:

Restating Prior Periods 

If you are a private company whose fiscal calendar ends on December 31, 2022, and you present two years in your financial statements, then your initial application date would be January 1, 2021. You would adopt the new lease accounting standard for both 2021 and 2022, which includes restating 2021.

Not Restating Prior Periods 

If the same private company elects to not restate prior periods, your initial application date would be January 1, 2022. You would adopt the new lease accounting standard for 2022, resulting in a difference in accounting between 2021 and 2022.

Transition Period

Why should you care about the initial application date? Because of the period in between known as the transition period.

During this time, organizations are required to adjust their financial statements to comply with new lease accounting standards, like ASC 842. Unless the transition practical expedients (the “package of three”) are elected, these adjustments may include reviewing and updating their lease contracts, re-evaluating lease classifications, and recalculating lease expenses and related balance sheet amounts.

The transition period is important because it allowed organizations to adjust to the new requirements of the lease accounting standard gradually, rather than all at once. It also allowed organizations to identify any potential issues or challenges during the transition and make any necessary adjustments before the new lease accounting standard effective date.

While this is relatively complicated to figure out, the good news is that there are practical expedients available, along with great software like LeaseCrunch, to simplify the work required during the transition period. Further, many organizations simply elect to not restate prior periods, which simplifies lease accounting standard adoption significantly.

Other Important Dates for Individual Leases

Commencement Date

Another important date for individual leases is the commencement date, which is when an underlying asset is available for use by the lessee. It’s important to note that this may not be the date when the lessee signs an agreement with a lessor. However lease classification and measurement should take place at the commencement date.

Modification Effective Date

Sometimes leases are renegotiated. If this results in a new contract, renewal, or another extension not previously anticipated, it is treated as a new lease. Otherwise, assumptions such as the discount rate, fair value, and remaining economic life of the underlying asset are reviewed and updated as of the modification effective date, with modification gains and losses also recognized as of the same date.

Remeasurement Date

Other times, a triggering event occurs that was not otherwise anticipated. Generally, this is something that requires the lessee to reassess the lease term. The date on which this triggering event occurs is called the remeasurement date. Note that the lessee should update the discount rate and any variable lease payments as of the remeasurement date.

How LeaseCrunch Can Help

Figuring out the best way to transition to the new lease accounting standard effective date can be difficult, but it doesn’t have to be done alone. With LeaseCrunch’s automated accounting software, you can save time and simplify your transition to the new lease accounting standards, even after the ASC 842 effective date, ensuring your organization’s leases are being counted correctly for the fiscal year.

Want to learn more? Request a demo or contact us to see what LeaseCrunch can do for you.

Frequently Asked Questions

What Is the ASC 842 Effective Date?

The ASC 842 effective date depends on the type of organization. For public companies, the lease accounting standard effective date went into effect for fiscal years starting after December 15, 2018. For private entities and non-profit organizations, the lease accounting standard effective date went into effect for fiscal years starting after December 15, 2021. 

Has ASC 842 Been Delayed?

Yes, the lease accounting standard effective date for ASC 842 was delayed twice. The first time occurred in 2019 due to private companies struggling to absorb the many previous accounting and tax changes that had been implemented. The lease accounting standard effective date was then delayed again in 2020 to provide relief for private entities during the COVID-19 pandemic. The ASC 842 effective date was officially adopted for these entities for fiscal years starting after December 15, 2021.

When Was the ASC 842 Effective Date for Private Companies?

The lease accounting standard effective date for ASC 842 is effective for private companies'  fiscal years starting after December 15, 2021. This means that for private companies whose fiscal year ends with their calendar year, the new standard applies to financial statements issued for the year ended December 31, 2022, and including interim reporting periods after 2022.

What Is the Commencement Date of a Lease Under ASC 842?

The commencement date of a lease under ASC 842 is the date on which a lessee has the right to use an underlying asset. This is not the date when a lessee and lessor agree on the rights to an asset. Lease classification and measurement should take place on the commencement date.

Why Was ASC 842 Implemented?

ASC 842 was implemented to increase financial transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This change has made company financial standings more accurate and fostered improved financial insights.

Does ASC 842 Apply to Existing Leases?

Yes, ASC 842 applies to existing leases. Companies must reassess and potentially adjust the reporting of all their current leases to ensure transparency and accuracy in line with the new standard.

What Is the Lookback Period for ASC 842?

The lookback period for ASC 842 is the period from the beginning of the earliest comparative period up until immediately before the effective date.