Blog November 27, 2019

ASC 840 and ASC 842 – the importance of dual reporting

By Tom Price
The transition from ASC 840 to ASC 842

The new era of lease accounting is in full force with the introduction of ASC 842 in early 2019, superseding the previously engrained guidelines of ASC 840. With that comes a shift in business reporting, but the way businesses report cannot completely change overnight – there needs to be a period of transition. Most businesses plan their budgets and measure growth, performance, success or failure through comparative KPIs, year on year. As the stress of half-year and full-year reporting creeps up to greet finance teams globally, shareholders, key stakeholders and analysts will be waiting in the wings to see the new numbers – and the variations from last year to this – all in order to accurately evaluate company performance, identify trends and inform strategic decision-making.

But, reviewing numbers in the context of the new ASC 842 guidelines, with no previous benchmark or equivalent to compare, will result in EBIT figures being wildly different and bearing little to no value or benefit. Maintaining the straight-line reporting method of ASC 840, alongside the new mandatory ASC 842 reporting standard, provides businesses with comparable accounting figures, creates a foundation for comparison when reporting future periods like for like, and ensures compliance.

More insightful reporting may not be the only benefit. Organisations are encountering situations where they are obligated to report under ASC 840 in order to abide by the specific measures outlined in their banking covenant. At MRI, we’ve found, in some scenarios, organisations are required to report to GAAP at the time their agreement was signed – and the impact of entering renegotiations to change this to the new ASC 842 standard would incur significant legal costs that businesses are, naturally, keen to avoid.

There are other factors and reasons we’ve encountered as we’ve supported the journey of more than 400 clients transitioning to ASC 842 and IFRS 16. For instance, some continue to adhere to ASC 840 for tax accounting purposes. In these instances, we’re seeing organisations effectively producing two sets of books, dual reporting to both the current and previous standard. When we speak to companies looking at our ASC 842 lease accounting software, there is often a requirement for ASC 840 reporting capabilities.

When it comes to the actual task of dual reporting to both of these standards, it’s easy to see how this can place a strain on finance teams. For organisations using manual methods such as spreadsheets, it can be a case of duplicating the data set to produce a different set of values for each standard. It’s a complex enough task to undertake once, let alone twice. The ongoing maintenance can become increasingly arduous as the portfolio evolves, with exercised lease options, fluctuating rental values, indexation uplifts and back-dated charges, for example, all impacting the reporting figures.

Depending on the size of the organisation and the lease portfolio in question, these constant recalculations can very quickly result in dedicated full-time roles for individuals within the finance function. Maintaining two sets of lease data, sometimes on separate software solutions, also creates problems. Not only is it inefficient, but reconciling between the two creates significant doubt around the accuracy and integrity of data.

Any organisation searching for software to manage its leased portfolio and report to ASC 842, with a continual focus on dual reporting to ASC 840, should place significant importance on ensuring that a single lease record drives and produces the required. At MRI Software, our end-to-end solution captures lease data at source and automates key lease processes to produce both ASC 840 and ASC 842 calculations from one a single master data set. It can also create alerts, notifications and judgements for effective cross-departmental collaboration.

We may well be entering a new era of lease accounting and reporting but, in the short-to-medium term, we anticipate a continuing prominence of ASC 840 in the way businesses evaluate, report and make evidence-based decisions. This only emphasises the importance of effective lease management, and the adoption of technology to reduce the burden.

 

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