From Modifications to Abandonments: A Deep Dive into ASC 842’s Most Complex Scenarios

Adopting ASC 842 has completely updated lease accounting, presenting CPAs with a brand new set of guidelines for accounting for the various changes made to a lease agreement over its term. In a recent webinar, Jaron Moss, a CPA and technical accounting consultant at FinQuery, and former auditor, delved into the intricacies of applying ASC 842 to various lease scenarios, highlighting the challenges CPAs face in ensuring accurate financial reporting and compliance.

This article explores how the new lease accounting standards impact the day-to-day work of accountants, some of the complex scenarios encountered, and the skills and knowledge needed to navigate these complexities effectively.

Lease Modifications and Reassessments: Adapting to Changes

Lease modifications and reassessments are common scenarios that require CPAs to apply their understanding of ASC 842 to ensure accurate financial reporting. As Jaron Moss explains, “A modification is a change in the terms and conditions of a contract that results in a change in the scope or consideration of a lease. Essentially, you go to the lessor, renegotiate the contract, and you get a new contract. That’s a modification or amendment.”

Modifications involve changes in lease terms, while reassessments occur when the lessee’s facts and assumptions change without renegotiating with the lessor. Accounting for modifications and reassessments differs in terms of:

  • Reallocating consideration
  • Reassessing lease classification
  • Updating discount rates

Navigating lease modifications and reassessments requires a deep understanding of ASC 842 and the ability to adapt to changes in lease contracts.

Partial Lease Terminations: Two Approaches to Consider

Partial lease terminations present another complex scenario CPAs must handle in accordance with ASC 842. These occur when a lessee reduces the leased assets to a lesser amount. Accountants must be aware of two approaches for accounting for partial terminations:

  1. Adjusting the right-of-use asset (ROU asset) proportionate to the change in the lease liability
  2. Adjusting the ROU asset proportionate to the change in the asset itself

Calculating adjustments to the lease liability and ROU asset, and a gain or loss on the partial termination requires a thorough understanding of the different approaches to ensure accurate accounting.

Lease Impairments and Abandonments: Identifying and Accounting for Complexities

Lease impairments and abandonments are complex scenarios that require CPAs to apply judgment and knowledge of ASC 842 and related guidance. “When a lease impairment is recognized, the carrying amount of the lease is adjusted downward to its recoverable amount, which is the higher of the fair value less the cost of disposal or its present value of future cash flows,” explains Jaron Moss.

Lease impairments occur when the recoverable amount of a leased asset falls below its carrying amount. Lease abandonments occur when the lessee stops using a leased asset before the lease term expires without the lessor’s consent. Accountants must be able to identify and account for lease impairments and abandonments appropriately. Leveraging technology allows CPAs to handle complex calculations more efficiently and focus on providing value-added insights.

As Jaron Moss states, “Keep in mind, using a tool is one of the best ways to handle these types of complex lease changes, so you don’t have to spend your time on these tedious, complex calculations. You can focus on the areas that add more value to your organization.” 

Those looking for a tool to assist with the complexities of lease accounting and compliance should consider the solutions offered by FinQuery.

Embracing the Future of Lease Accounting

The adoption of ASC 842 has significantly impacted the accounting profession, requiring CPAs to stay up-to-date with the latest guidance and best practices. Accountants who can effectively navigate lease accounting complexities will be better positioned to serve their clients and organizations in the post-ASC 842 landscape.

To gain a deeper understanding of the complexities of lease accounting under ASC 842 and learn how to navigate these challenges effectively, watch the webinar recording.