We continue our series on the current issues affecting nonprofits with a look at lease implementations. For many years, Topic 840 was the lease accounting standard. However, in 2016, the Financial Accounting Standards Board (FASB) issued Topic 842. It is often referred to as Accounting Standards Update (ASU) 2016-02 or Accounting Standard Codification (ASC) 842.
As outlined in this updated standard, the changes for how leases would appear on financial statements were quite different than previously done. Private companies and nonprofits alike scrambled to understand ASC 842 and to adjust to the changes in financial and accounting practices.
In this article, we highlight the most important ways ASC 842 affects your not-for-profit (NFP) in 2022 and beyond.
Why Topic 842
Topic 840 was first released in 1977 and wasn’t phased out until 2016. That makes Topic 840 ancient in terms of accounting standards. But FASB and the Securities and Exchange Commission (SEC) listened to concerned stakeholders, board members and investors when they worried about knowing the true financial picture of an organization.
It was due to this concern that Topic 842 was issued in 2016.
Future Lease Payments
But what does this have to with 2022 and beyond?
Great question! Because if you’re a nonprofit, ASC 842 most definitely will affect your statement of financial position.
Prior to Topic 842, balance sheets were not required to show future lease payments for operating leases. With facilities and equipment leases being the second largest expense for most NFPs, only behind employee pay, investors and stakeholders wanted a clearer picture of an entity’s financial standing.
With ASC 842, an organization now must show facility and equipment leases for both a right-of-use (ROU) and a correlating liability, which is the entry to indicate future lease payments. By recording both of these amounts, interested parties get a better understanding of a NFP’s current risk exposure and financial capabilities. (Before ASC 842, investors and other stakeholders argued that they did not get a whole picture of a company’s risk exposure.)
How the COVID-19 Pandemic Affected Topic 842
To no one’s surprise, the pandemic affected the full adoption of ASC 842. When it was issued in 2016, it was to be effective by January 2020 for almost every company and NFP. The effective date was delayed due to the havoc COVID-19 caused around the world.
ASC 842, however, is coming into effect for the 2022 calendar year and the 2023 fiscal year. Nonprofits are now attempting to fully realize the impact it will have on their statements of financial position.
There’s More to ASC 842
In this article, we focused on the biggest change from Topic 840 to Topic 842 – the disclosure of future lease liabilities. But, there’s more to ASC 842 you should know for your NFP. For example, lease classification, whether it’s deemed operating or finance, must be decided when the lease starts, not when the lease is first conceived or signed.
Also under Topic 842, lease classification changed a bit. While the four generally accepted criteria for leases stayed the same, a fifth indicator was added for very special assets. And the 75% and 90% rules for the useful life of the asset and the fair value of the leased property (respectively) was removed.
Morgan & Associates Are Here to Help with Lease Implementation
Here’s the deal. Accounting standards change over time. The COVID-19 pandemic affected everyone and everything, including accounting practices. We have nonprofit specialists who delve into the changes and are ready to help your NFP prepare correctly your statement of financial position.
Don’t hesitate to reach out to us. After all, your financial statement is one of the most important documents you create. We can help.