7 Tips for Nonprofits Implementing the New Lease Standard
After numerous delays, the new lease standard has arrived. Any nonprofit organization with at least one lease will be impacted for years beginning after December 15, 2021, which will generally be your nonprofit organization's accounting year end for the 2022 calendar year or possibly your fiscal year ending June 30, 2023.
With some calling this the biggest accounting change of this generation, it's crucial that nonprofits be prepared for the new standard. That’s why we created a list of seven tips to help ensure your nonprofit is set up for success when implementing the new lease standard, also known as Accounting Standards Codification (ASC) 842, Leases.
1. Establish an Implementation Team
Your accounting department, along with other team members like facilities staff and office managers, should be a part of the implementation team. Depending on the structure of your nonprofit, your accounting department may not be aware of ALL the leases at ALL of your organization's locations, so it’s important the implementation team includes the right people.
This is also a great opportunity for the accounting department to educate other departments and applicable volunteers on the new lease standard and why it’s critical leases are sent to the accounting department for review and maintenance of records.
Finally, consider including your external CPA in the lease implementation, as they can provide valuable insight and best practices. It will also expedite the year-end work if your CPA has a good handle on the lease schedule.
2. Keep Your Board of Directors in the Loop
Depending on the size of your organization, the implementation of the lease standard could have a staggering effect on your balance sheet. Therefore, the accounting department needs to keep the board of directors informed on what exactly will change with this broad-reaching new accounting standard, as it'll eliminate any confusion when there is a significant increase in liabilities on the balance sheet.
3. Inform Grantor Agencies
Some grants may come with certain stipulations requiring the amount of debt and liabilities on the balance sheet to be minimal, depending on the specifications of your grant agreements. Due to these possible requirements, it is crucial your grantor agencies are made aware that the new lease standard will increase liabilities, so they don’t think your organization is taking on unnecessary debt — you are just implementing a new accounting rule.
4. Create a Central Location and Tracking System for the Nonprofit's Leases
The key to this new standard is staying organized. We suggest creating a paper folder or location on your computer where your organization keeps copies of all lease agreements, including original agreements and amendments, as soon as possible since tracking down leases and amendments can be very time-consuming. When maintaining documents, it’s helpful to create a tracking mechanism by indexing leases in a logical system for quick review and access.
5. Review Lease Documents to Determine Applicability and Identify Key Lease Terms
The new standard changes the guidance on what qualifies as a lease. Under ASC 842, an arrangement is a lease only when the right to control the use of an identified asset to a customer is established, and the customer obtains substantially all its economic benefits.
It’s important to review agreements and ensure those identified as a lease actually qualify as a lease under ASC 842. Additionally, when reviewing the lease documents, maintaining a spreadsheet that summarizes all leases with key terms will come in handy.
6. Consider Purchasing a Lease Accounting Software
In addition to changing the journal entries required for operating leases, the new lease standard also requires significant footnote disclosures. If your nonprofit has multiple leases, a lease software may save your organization time and reduce errors.
Many lease software packages generate required journal entries and disclosures with a click of a button. This will save your accounting team countless hours, reduce errors, and make the auditing of the lease standard easier for your external CPA.
If you’re unsure about where to start, consult your CPA for recommendations as there are many on the market. We explored several solutions in Lease Accounting Software Options.
7. Get Advice From Your External CPA
Your external CPA can assist with all stages of implementation — saving time and frustration on the backend. Consult with your CPA early on and get them involved in the implementation process.
Want to read more about the new lease standard? Check out our Lease Standard Resource Center.
Contact us here or call 800.899.4623 with questions.
Published on August 31, 2022