Critical lease accounting policy decisions are imminent. Accounting teams that haven’t yet adopted ASC 842 must make some important choices for lease accounting data and policy as the compliance deadline for nonpublic companies looms at the end of 2021. Here are the five most critical decisions necessary to successfully navigate the compliance process.

1. When to start collecting lease data?

Companies are usually stunned to realize how many leases they have, and almost everyone wishes they had started collecting lease data earlier.  There can be hundreds of data points for each lease. Most companies spend several months gathering data. Decide to start sooner than later.

2. Which ASC 842 practical expedients to use?

Some of the most elected expedients include transitioning without reevaluating lease classification or if a contract contains a lease; using a portfolio approach; avoiding balance sheet treatment for short term leases; using a risk-free borrowing rate—for nonpublic companies; and combining lease and non-lease components. Combining lease and non-lease components is commonly elected because it reduces complexity. However, some companies forgo this expedient because it generally results in higher lease liability balances.   

3. How to collect discount rates and determine fair market values (FMVs)?

Managing hundreds of discount rates and determining FMVs for leased assets can be extremely time consuming. However, deciding to adopt highly developed lease accounting software from CoStar automatically performs discount rate matching and even provides data to perform FMV analysis.

4. How to apply materiality thresholds?

ASC 842 doesn’t specify a set materiality threshold, but a reasonable threshold is allowed.  Many companies decide to apply a policy similar to one already in place for fixed assets, while some dual reporting companies align with the $5,000 threshold prescribed by IFRS 16.

5. How to establish and maintain internal controls?

Internal controls are often an afterthought during the push for compliance. Selecting a lease accounting software with built-in controls, approval workflows and audit details that remove risk factors throughout the process is the best decision.