At The Very LEASED

Ah, summertime!  Who doesn’t love the sights, sounds, and smells of summertime – the crack of the bat at a baseball game, the smell of s’mores around a campfire, the sounds of kids playing basketball on the driveway, and the application of ASC 842 – Leases.  Wait, what? 

This is our second installment in our lease series, and this week our discussion focuses on lease identification. 

Lease Identification 

Under ASC 842, a lease exists when payment is made by one party to another in exchange for the right to control the use of an identified asset for a period of time. Identified assets can be property, plant, or equipment. When considering accounting for leases, you should look to the terms and conditions included in the lease or contract. We include contracts here because not all lease transactions are included in an agreement that references a lease. Occasionally, it may not be obvious that a lease exists.  

Consider the following: 

• When identifying leases, start with the entity’s financial statements. The notes to the financial statements should disclose material operating and capital leases (now financing leases).  
• Next, the entity should look to any service contracts that include the use of an asset as part of the delivery of the service.  
• Then identify any assets used in the entity’s operations that are not included in the fixed asset listing. 
• Finally, review the entity’s transactions, including accounts payable and general ledger expense activity for payments that repeat on a monthly or quarterly basis to a vendor. These may require further review and analysis to determine if an embedded lease exists. 

Don’t lose sight of materiality when considering adoption of this standard. ASC 842 does not contain a materiality threshold for the recognition of a lease; however, paragraph BC122 of ASU 2016-02 states: “Entities can adopt reasonable capitalization thresholds below which lease assets and lease liabilities are not recognized, which should reduce the costs of applying the guidance. An entity’s practice in this regard may be consistent with many entities’ accounting policies in other areas of GAAP (for example, in capitalizing purchases of property, plant, and equipment).” This materiality consideration should consider the purpose of the standard while also considering reporting that is meaningful to the readers of the financial statements. 

As you work through these considerations, remember that you do not need to go this alone. Consider connecting with a professional who has experience in this area. As the Greek philosopher Epicurus said, “It is not so much our friends’ help that helps us, as the confidence of their help.” We are here to help! 

Our next blog in this series will discuss lease term considerations.   Thank you to Michael Westervelt and Brittney Fox who contributed to this post.