Lease Accounting Complexities: How to Cope

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If your business uses leases you'll know that accounting for them can be a little tricky. This is especially the case if you're a smaller business with limited accounting knowledge. The majority of businesses in the USA use leases to a certain degree. Some use them far more than others but as a business grows there's more chance you'll encounter the need to lease. On the other hand, many businesses are built around leasing equipment and even retail space to others. Leasing is an integral part of business operations but accounting for them can be tricky. 

 

Why You Should Accurately Account For Leases

You should account for them accurately because otherwise you might not get your deductible right which isn't good for your business. Some lease agreements are worth huge amounts of money. Think about leases on office space, building. They easily run into the tens of thousands of dollars, even more depending on business size. Even a small mistake in the depreciation treatment or lease contract could put your business out of pocket by a large sum.

Plus, accounting for leases accurately is a requirement laid down by US GAAP. Let's look at their most recent lease accounting guidelines.




ASC 842: The New Accounting Guideline 

Previously you could keep a lot of leases off the balance sheet as off balance sheet transactions. It gave businesses an air of privacy, but also caused problems in properly assessing a businesses value. As a result, ASC 842 was created and brought into use. The main change in the most recent accounting guideline is pretty much all leases must be brought into the balance sheet. It means your business will be more transparent. However, your competitors will face the same change in their reporting. If you want to accurately account for your leases and stay in line with GAAP you need to focus on ASC842 and make sure your accountant or accounting software is using the newest guidelines to account for your lease accounting arrangements. 

 

Lease Accounting: How To Stay Complaint 

Changes in accounting guidelines are always problematic. The trick is to seamlessly stay compliant so that you stay on top of lease accounting changes. This goes for all elements of accounting. If you have substantial lease arrangements you don't want to miss a beat if something changes. This is why lease accounting software can help give you peace of mind. Lease accounting software should automatically account for these wholesale changes, as well as any smaller changes that occur. If you're worried about lease accounting then focusing on utilizing the best lease accounting software available can put your mind to rest. 



 

Lease Accounting: Detail in the Contract

Remember, when you're entering into lease accounting contracts there's a lot of detail in the small print. You need to check the contract and make sure it's suitable for your business. You also need to try and work out how the contract would be treated from an accounting perspective. This can be hard to do because you're essentially thinking a few steps ahead. When your business is new too it's easy to be lured into lease agreements that seem cheap but thinking about the accountancy treatment can help bring you back to Earth and look at it more critically. 

In short, the changes to the lease accounting guidance have thrown up some complications to an already relatively complex area. However, with the right foresight and in using lease accounting software, you can make sure your lease accounting is on point and beneficial to you and your business.

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