What Nonprofits Need to Know About New Lease Accounting Standards

February 24, 2023

At a Glance

Main Takeaway

If you handle finances for a nonprofit, it is essential to understand issues related to lease accounting standards. For the financial reporting periods beginning after December 15, 2021, nonprofits are required to adopt new lease accounting standards if they report their financial statements under Generally Accepted Accounting Principles (GAAP). This includes nonprofits with financial statements for the years ended December 31, 2022, or June 30, 2023.

Updated standards for ASC 842 leases provide guidelines for how leases should be classified, accounted for, and disclosed in financial statements. This information is used by stakeholders such as donors, grantors, and regulators to assess a nonprofit organization’s financial health and performance.

Next Step

Familiarize yourself with ASC 842 lease accounting basics and learn how nonprofit accounting services from Windes will help you remain compliant with the new requirements.

What is ASC 842?

ASC 842 is the Accounting Standards Codification (ASC) for leases under U.S. GAAP. It is issued by the Financial Accounting Standards Board (FASB) and outlines the requirements for how lessees and lessors should account for leases on their financial statements.

The main goal of the standard is to provide more transparency and comparability in financial statements by bringing leases currently classified as operating leases onto the statement of financial position as right-of-use assets and corresponding lease liabilities, no longer keeping these commitments as just disclosures in the notes to the financial statements.

Understanding these new rules and developing an implementation timeline ensures you are ready to comply with these new standards.

What Nonprofits Need to Know

Nonprofits working towards implementing ASC 842 standards must focus on particular aspects of the new requirements. These include accounting process changes, financial statement disclosures, and exceptions.

Working with a firm like Windes, which offers lease accounting services for nonprofits, can help your organization comply with ASC 842.

Accounting Implications

The implementation of ASC 842 has several accounting implications for companies:

Leases are now recognized on the statement of financial position: ASC 842 requires lessees to recognize a right-of-use (ROU) asset and a corresponding lease liability on their statement of financial position for leases classified as “operating” leases under the previous accounting guidance (ASC 840). This represents the lessee’s right to use the leased asset and the obligation liability to make lease payments.

Operating and finance lease guidelines are more subjective: Before ASC 842, leases were classified as operating or finance leases with bright-line tests that differentiated each. However, under ASC 842, the distinction between operating and finance leases is more subjective, with certain criteria determined by the organization’s accounting policies.

Capital leases will be referred to as finance leases: A new name and changes to the test to determine the classification of a lease.

Increased transparency: By bringing operating leases onto the statement of financial position, ASC 842 aims to provide users of financial statements with more transparency and comparability regarding an organization’s lease obligations.

Complexity in calculations: It can be challenging for nonprofits to calculate the lease liability, as it requires estimating the present value of lease payments over the lease term using the lessee’s incremental borrowing rate. This can be complex and time-consuming, especially for organizations with several leases.

Overall, ASC 842 requires more complex accounting and disclosure for leases, which can be difficult and costly for nonprofits to implement. The main improvement of this standard is the increased transparency for users of financial statements, such as donors and regulators.

New ASC 842 Disclosures

ASC 842 requires companies to disclose the following information about their leases:

Planned leases that are not yet in effect
Losses and gains associated with lease transactions
Short-term lease elections
Discount rates and terms based on weighted average calculations
Judgments or assumptions affecting leases
Lease income
Risk management details
Future assessments of incentives and payments for leases

These disclosures are intended to provide donors and other users of financial statements with a complete understanding of a nonprofit’s lease obligations, the details of those obligations, and their impact on the organization’s financial position and performance.

Lessor Changes

ASC 842 includes several changes affecting lessors regarding accounting treatment and disclosures. These are less significant in impact than those that affect lessees.

ASC 842 Exceptions

ASC 842 has several exceptions and practical expedients (shortcuts) that nonprofits can use to simplify their lease accounting, including:

Short-term leases with a term of 12 months or less do not have to be recognized on the statement of financial position. Instead, they can be identified as operating expenses as incurred on the statement of functional expenses.
Intangible assets covered under ASC 350, like patents and copyrights
Biological assets under ASC 905
Other exceptions, as defined by the standard

These exceptions and practical expedients are intended to simplify accounting for leases, but they may only be applicable or appropriate for some nonprofits. Consult with an accounting firm like Windes for ASC 842 guidance to ensure your organization remains compliant and implements strategic accounting approaches for efficiency and cost savings.

Implement New Lease Accounting Standards

Implementing the new ASC 842 lease accounting standards is challenging for most nonprofits. Work with Windes to ensure you remain compliant and take advantage of all possible accounting strategies to save your nonprofit on lease operating expenses.

Windes’ ASC 842 experts will provide peace of mind by addressing differences between where your nonprofit stands today on lease accounting and where it needs to be to comply with these new rules.

Download our Countdown Checklist for FASB ASC 842.