December 9, 2020
Accounting, Business, Insight article
Authored By GreerWalker
In the past few years, the Financial Accounting Standards Board (FASB) has released a major update that affects many businesses— ASU 2016-02.
Failure to make the necessary changes can cause your organization to be penalized and possibly audited. This could also result in fines and disappearing stakeholders, which could be even more catastrophic towards achieving your sales goals. Make sure your organization is up-to-date with accounting standards compliance!
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ASU 2016-02, Leases (Topic 842)
This ASU provides new regulations which affect all organizations that lease assets, such as real estate, vehicles, and equipment. Previous standards differentiate reporting requirements based on whether an agreement is a capital lease or an operating lease. ASU 2016-02 changes this by requiring all leases with terms of more than 12 months to be reported in terms of assets and liabilities. Here are some additional areas which will be changing:
1. Measuring and reporting:
The method used to measure cash flows and expenses for each lease will depend on whether it’s a finance lease or an operating lease.
2. Disclosures to stakeholders:
In order to help readers of financial statements better understand cash flows related to leases, organizations will be required to disclose more information about details, such as variable lease payments and lease renewal/termination options.
3. Combined contracts:
If a contract includes both lease and service components, businesses will still be required to separate these components. The difference is that ASU 2016-02 gives more guidance on how to do so.
Your organization should begin considering these changes when negotiating any new leases and may want to modify existing leases. These regulations may change your priorities, especially if additional lease liabilities will have a strong effect on your balance sheet.
This is just one example of accounting rules and regulations that can pop up unexpectedly. Early adoption is allowed and advance preparation is advised, but you shouldn’t have to be responsible for researching all these new rules.
If you haven’t already made changes to your accounting practices based on the latest requirements, you should do so as soon as possible. Accounting firms like GreerWalker make it their business to stay up to date on ever-changing accounting laws and regulations. Contact us to learn how we can help you navigate complex regulations so you can spend more time focusing on your bottom line.