Overview: Company-Level and Location-Level Setup
One important thing to understand upfront is that ASC 842 setup happens on two levels: the Company Level and the Location Level. Each serves a distinct purpose:
Company-Level Setup: Define your overarching accounting policies, such as fiscal year, accounting calendar, and default GL codes. These settings create a financial baseline, ensuring consistent, consolidated reporting across all leases.
Location-Level Setup: Configure the specific details for each lease, including unique terms, dates, and incentives that influence financial reporting. This ensures that Leasecake generates accurate, lease-specific schedules and journal entries.
1. Company and Fiscal Basics
This section establishes the fundamental accounting structure and policies across all leases, creating a consistent reporting baseline.
Key Fields and Settings:
Year Established: Reference point; does not affect calculations but provides historical context.
Accounting Calendar: Choose a 12- or 13-period calendar to align lease schedules with reporting periods, supporting consistent year-over-year comparisons.
Fiscal Year Start: Syncs Leasecake reports with your company’s financial year for uniform reporting.
Books Closed Through: Prevents retroactive modifications to finalized lease measurements, maintaining data integrity and reporting accuracy.
2. Enabling ASC 842 Configuration
Enabling ASC 842 opens fields necessary for lease amortization schedules and journal entries that meet compliance requirements.
Key Fields for ASC 842 Setup:
Adoption Date: Marks the starting point for ASC 842 compliance tracking. This date should align with the beginning of your fiscal calendar.
Convert from ASC 840: This option helps companies transitioning from ASC 840 by automatically adjusting Right-of-Use (ROU) assets. It factors in deferred rents, which are recalculated by Leasecake.
3. Discount Rate Configuration
The discount rate is essential for calculating the present value of lease liabilities and Right-of-Use (ROU) assets.
Discount Rate Options:
Incremental Borrowing Rate (IBR): Commonly used, representing the interest your company would pay to borrow funds for a similar asset.
Risk-Free Rate: This is an alternative to an IBR and is available for private companies based on Treasury yields.
Each option affects ROU asset and liability calculations, so choose carefully.
4. Account Codes
Account codes categorize lease expenses, ensuring consistent financial reporting across leases in alignment with standard accounting codes.
Key Account Codes for Operating Leases:
Accounts Payable: For most lease payment obligations.
Accrued Accounts: Records lease expenses incurred but unpaid.
ROU Asset Lease Expense: Reflects costs associated with asset usage.
ROU Asset Account: Where the ROU asset is recorded.
ROU Liability: Divided into short- and long-term, representing future payments owed.
Additional Accounts for Lease Compliance:
Tenant Incentives: Tracks landlord-provided incentives (e.g., rent reductions).
Indirect Costs: Covers costs related to lease acquisition.
Prepaid Expenses: Accounts for lease expenses paid in advance.
Once you've set up these codes, Leasecake enables you to apply the account settings universally across all locations, helping to speed up the set up process.
5. Journal Entry Reports & Integrations (Optional)
Email Journal Entries: Configure email delivery for periodic updates, making it easy to monitor lease-related entries without logging into Leasecake. Specify frequency and recipient details; recipients do not need to be Leasecake users.
Push to Accounting Systems: Available on the Grow package for direct journal entry pushes to Sage Intacct, NetSuite, Restaurant365, and QuickBooks Online, automating data entry and integration with primary accounting systems.
6. Location ASC 842 Configuration
Configuring Each Lease for Compliance:
Location-level setup captures lease-specific details and ensures ASC 842 compliance.
Lease Type Classification:
Operating Leases: Commonly used, typically for leases without ownership transfer or major economic benefit.
Finance Leases: Used when the lease meets financing criteria.
Critical Dates:
Lease Commencement Date: This is the date explicitly stated in the lease agreement as the official start of the lease term.
Possession Date: This is the date the tenant is legally allowed to move into the
property and take possession.
Lease Expiration Date: Establishes lease term end for total period calculation.
Renewal Options:
The “Reasonably Certain” option allows companies to include probable renewals in their lease calculations. This extends the lease term on the balance sheet, giving a fuller picture of long-term obligations.
Why Mark a Renewal as “Reasonably Certain”?: Including renewals affects the ROU asset and lease liability, offering a more comprehensive view of lease commitments.
Example: If you expect to renew, Leasecake will adjust the ROU asset and liability based on the extended term, ensuring your balance sheet reflects this commitment accurately.
If your company previously included renewal options in lease terms under ASC 840, it’s recommended to continue this approach under ASC 842. Keeping a consistent policy helps maintain reliable reporting and avoids sudden shifts in your lease term assumptions.
7. Adjustments and Initial Direct Costs
Prepayments: Offset against the initial ROU asset, reducing its balance.
Initial Direct Costs: These increase the ROU asset’s initial value and cover expenses like broker or legal fees associated with lease acquisition.
These adjustments impact the initial ROU asset balance, providing a realistic valuation.
8. Discount Rates
The discount rate influences present value calculations for lease payments.
Options:
Incremental Borrowing Rate: The interest rate a company would pay to borrow funds to purchase an asset similar to the one leased, over a similar term, and in a similar economic environment.
Risk-Free Rate: The theoretical rate of return of an investment with zero risk. represented by the yield on government bonds
9. Setting Override Values at Adoption Date
When adopting ASC 842, Leasecake allows you to enter override values for certain lease components to ensure that your beginning balances align accurately with your records. Here’s how to handle each override option:
1. Override Deferred Rent Balance at Adoption Date
Purpose: Use this option to adjust the starting balance of any deferred rent. Deferred rent occurs when there is a difference between straight-line rent expense and actual cash payments up to the adoption date.
How to Set: Enter the total deferred rent balance that should be carried over from your prior accounting records. This amount will impact your Right-of-Use (ROU) asset calculations under ASC 842.
2. Override Unamortized Incentive Balance at Adoption Date
Purpose: This override is used to set the remaining balance of any unamortized incentives. Unamortized incentives are amounts the lessor provided as lease incentives (like allowances or improvements) that have not yet been fully recognized as a reduction in lease expense.
How to Set: Enter the incentive balance remaining from your prior records, which will reduce your ROU asset at the adoption date. This ensures any unrecognized incentives are correctly accounted for under ASC 842.
3. Override Unamortized Rent Prepayments at Adoption Date
Purpose: This adjustment is for any lease payments made in advance (prepayments) that haven’t yet been recognized by the adoption date.
How to Set: Input the total unamortized rent prepayment balance from your records. This amount will offset your ROU asset, reflecting the prepayment’s impact on your beginning balances.
4. Override Unamortized Indirect Costs at Adoption Date
Purpose: Unamortized indirect costs are any costs directly related to obtaining the lease (such as broker fees or legal costs) that have not yet been fully recognized.
How to Set: Enter the balance of these costs as of the adoption date. This will increase your ROU asset, ensuring indirect costs are correctly included in the lease accounting under ASC 842.
10. Final Configurations
Include in Accounting Reports: Ensure most recent measurement is reported.
Paid in Advance: In ASC 842 lease measurement, paid in advance means rent is due at the start of each month, while paid in arrears means rent is paid at the end. Most real estate leases are paid in advance, reducing the lease liability immediately and leading to lower interest expense for that period.
For paid in advance leases, interest is calculated on a reduced balance from the start, reflecting the upfront payment.
For paid in arrears leases (common with vehicles and international leases), interest accrues on the full balance throughout the period, resulting in slightly higher interest expense.
Example:
A retail lease at $10,000/month, paid in advance, reduces liability on the first day, lowering monthly interest. In contrast, a vehicle lease of $5,000/month paid in arrears keeps the full liability for the period, increasing interest.
11. Configure and Test Reports
Choose reports such as amortization schedules, roll-forward liabilities, and lease disclosures.
Check that each report provides the expected data format and matches your accounting period requirements. For example, run both short-term and long-term liability roll-forward reports to confirm the accurate breakout of obligations.
Ensure amortization schedules reflect the lease terms and journal entries are complete.
12. Preparing for Audits and Future Adjustments
Consistency with Lease Policies: Establish a clear, consistent approach for option renewals and reasonable certainty assumptions to maintain audit compliance. If adjustments are made, document each change and verify against the initial assumptions to keep reporting consistent.
13. Set User Permissions
Ensuring only authorized users manage lease accounting settings and data minimizes errors and secures sensitive financial information.
User Permissions:
Account Owner: Can create, edit, and delete lease settings, assumptions and generate reports. (And all other areas of Leasecake)
Administrator: Can create, edit, and delete lease settings, assumptions and generate reports. (And all other areas of Leasecake)
Accounting Manager: Can create, edit, and delete lease settings, assumptions and generate reports.
Accounting Observer: Can view lease settings, assumptions and generate reports.
Maintenance Manager: No access to lease accounting.
Manager: No access to lease accounting.
Observer: No access to lease accounting.