The Financial Accounting Standards Board (FASB) recently issued an update to ASC 842 that addresses complexities associated with discount rate calculations affecting non-public companies with leased assets.
The update to ASC 842 simplifies how private companies and nonprofit organizations determine the present value of lease payments. The proposed policy allows non-public companies to make risk-free rate elections by class of underlying assets rather than at the entity-wide level.
Why was the discount rate update proposed?
Before the update, companies ran into similar challenges when determining the discount rate and present value of lease payments. They had to use the rate implicit in the lease to calculate the right of use (ROU) asset and lease liability. However, the rate implicit in the lease isn’t always accessible.
Given the difficulties private companies were experiencing, FASB recognized a need to streamline calculation guidance – and in response, proposed and issued this discount rate update.
How do non-public companies apply the new discount rate guidance?
Organizations may now make a policy election to use a risk-free rate as the discount rate for all leases. This calculation is much easier to run, which helps businesses save time and lowers the impact on the balance sheet.
Not yet compliant with the lease accounting guidance updates?
The discount rate update issued by FASB to ASC 842 is just one example of why non-public companies can benefit from lease accounting technology. Beyond providing lease accounting automation, ASC 842 software like CoStar Real Estate Manager is equipped to seamlessly adapt to lease accounting standards or a lease portfolio changes.
It can also streamline lease accounting process by automatically generating audit-ready journal entries, disclosures, and reports that are needed to achieve and sustain compliance.
The right solution will provide the visibility to thoroughly understand lease data and use that information to make better informed operational decisions.
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