2022 started with a significant update to the reporting regarding renting, and leasing, and how they should be addressed in the books. In the USA this regulation is called ASC 842 and its European parallel is the IFRS 16. Although this regulation was a must in some scenarios, several changes and clarifications are now implanted.
Neglecting this fact is possible within private companies only, yet doing so might cause disclosure to be listed under this sector. Any disclosure adds a pinch of uncertainty to the accounting book's credibility which might prevent investors to put their trust (and money) in the company. Fear not because this article will explain everything you need to know about IFRS 16 and ASC 842.
Here you will find answers to:
IFRS 16 and ASC 842
Many accounting regulations have a twin on the other side of the globe. These regulations are no different, excluding some nuances, ASC 842 is the American IFRS 16 and vice versa. This regulation addresses the when, where, how, and if a certain rental or lease should be stated in the accountant's financial books.
While both are commonly considered a must for public companies, the IFRS 16 is only mandatory for private companies since 2019. ASC 842 on the other hand became mandatory for private companies just recently (Jan 2022). As many CFOs are now starting to prepare to finalize this year’s books it is important to remember this regulation is now often mandatory.
Stating rentals and leasing to the accounting books
Unlike other statements, to follow the guidelines for a proper fair market value enlisting, a professional is required. Only a dedicated accountant for this purpose can accurately accomplish the necessary calculations, as they are comprehensive and a bit tricky. In any way, it is recommended to consult with your accountant about whether or not the IFRS 16 or ASC 842 should apply to you.
Should you follow the IFRS 16 / ASC 842 regulations?
Well, the short answer is YES, it is definitely and highly recommended to avoid any disclosure appearing in your books. When facing a potential investor or people you desire to add to your board, disclosures relating to the financial upkeep may come as a bright red flag. To avoid adding difficulty to an already unpleasant situation, it is highly recommended to follow the regulations and to quadruple check 10 times if your company should or shouldn't do so.
That being said, a few scenarios do not require upkeeping these regulations but as we stated earlier, please consult with your accountant before deciding how to act. If a company holds a rental contract that is signed less than a year prior to the statement they don’t have to apply the IFRS 16 and ASC 842. For example, a company working in a shared working space location won't be obligated to report under the regulation because their contract is commonly up to 3 months ahead.
Another reason to legally ignore the IFRS 16 and ASC 842 relies on magnitude. If the leased item is considered to be insignificant to the company’s complete financial statement (leased keyboards for example) it can be stated without adjusting it to a fair market value. As always accounting is a game of numbers, any expanse value is sometimes arbitrary and subjected to the company’s total expenses. Other times it is highly precise and obligated to specific numbers within the regulations. In the case of the IFRS 16 and ASC 842 regulations, it varies so make sure to understand exactly the value of your rentals before deciding what to neglect from the reports.
Credit risk measurement for rentals and leased possessions
In order to accumulate any contract for rentals and leased possessions under a fair market value (in accordance with the IFRS 16 \ ASC 842), credit risk measurement and an effective interest must be calculated first. Unfortunately, only a few companies can quickly and efficiently, come by a precise credit risk measurement as well as an effective interest that is compiled with IFRS 16 and ASC 842. Fortunately, altshare is one of them. We happily consult any company that struggles to understand these regulations. We offer a complete effective interest calculation to any rented or leased equity, and a fast credit risk measurement.
Even if for some reason you decide to go through this process without altshare, we highly recommend using trusted professionals, imprecise bookkeeping might become a nightmare story up ahead. Make sure the accountant or company your pick can adjust both regulations and understand the new updates as well as how to calculate the credit risk measurement within leased possessions. An effective interest that complies with the IFRS 16 and ASC 842 regulations can be tricky so choose carefully who will accomplish this for you.
The 2022 update to IFRS 16 and its American twin ASC 842 obligates private companies to enlist their accounting books rented and leased company possessions under fair market value. To do so, they must come by their credit risk measurement and for each rental or leased contract, an effective interest. Not many companies can accomplish this feat for both IFRS 16 and ASC 842, effectively altshare can. Although on some occasions a company does not require to follow these regulations, even after the recent updates, it is still highly recommended to consult with a trusted expert.
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