Annoyingly, accounting standards change all of the time. Some of them are pretty small and they don’t really impact you. Yet, some can completely change the way you draw up your accounts. Accounting changes sometimes fly under the radar causing business owners to make mistakes. That’s why it pays to keep track of the changes so you can apply them to your business quickly. The recent lease accounting changes are a prime example of changes that impact the accounting treatment for businesses with lease arrangements. Here are how accounting changes can impact your business and how you can deal with them.
The Problem With External Perception: ASC 842
The recent accounting change, ASC 842, was created to ensure better transparency for businesses. One of the key changes with these accounting updates is how people observe your business because they’ll have a far clearer view of your balance sheet. This is a good thing in a way, because it creates a fair playing field and properly showcases your financial and lease position for potential investors. It might frustrate you, but when you realize your competitors are in exactly the same situation, dealing with the same problem, it’ll all make sense. So, let’s check a more direct example by looking at how ROU assets have changed (right of use asset).
What’s Changed With An ROU Asset
Businesses now have to record an ROU asset, or right-of-use asset, along with a lease liability to their balance sheets for almost all of their leases. Previously, only lease agreements that resembled purchases, known as capital leases, had to be recorded this way. As you can see, now, your ROU assets will be on the balance sheet, viewable by those seeking to audit your business or those trying to value it. So, you need to make sure, if you draw up your own accounts, that this is something you take into consideration.
How To Manage The Change
If you’ve got an accountant it won’t be too hard. You just need to speak with them and make sure that they understand the changes that have taken place. They probably will have. If you’re drawing up your own accounts then you might want to use lease accounting software to help you out. Remember, you have to do it properly otherwise when they’re audited you’ll get pulled up on it, costing you more time and money.
Keep Up To Date
One of the ways to avoid large business impacts is by keeping up to date with these accounting changes so you can get ahead of the curve. If you’re an American business and follow GAAP, you can follow the FASB for all and upcoming changes to accounting practices. Again, it is slightly time consuming but the reality is that it’s better to know about it and sort it out beforehand proactively rather than finding out there have been changes after you’ve already incorrectly drawn up your accounts. You don’t have to check it all the time either, periodically will do. If you’re really worried, chat to an accountant or use software that takes this stuff into consideration automatically. Sure, it’ll cost you a bit more but it’ll give you the gift of time that you can then put back into your business.