Lease Accounting Standard Effect Nonprofits Financials YE 2022 or FY 2023
Accounting Standards Codification (ASC) Topic 842, also known as the new lease accounting standard, has brought significant changes to the financial reporting practices of organizations across various sectors. While the standard was first implemented with for-profit entities, non-profits are now expected to implement in Year End 2022 or Fiscal 2023 financials, depending on the organizations accounting year.
ASC Topic 842, issued by the Financial Accounting Standards Board (FASB), replaced the previous lease accounting standard, ASC Topic 840. Its primary objective is to improve transparency and comparability in financial reporting by requiring organizations to recognize lease assets and liabilities on their statement of financial position (also referred to as the balance sheet). Under ASC 842, most leases, including operating leases, are required to be reported on the statement of financial position.
In most cases many nonprofits, up until ASC Topic 842's implementation date, had recorded a lease on their statement of activities each month when their bill came due. There was no change or activity to the statement of financial position, other than a cash decrease when payments were made.
Nonprofits will still record a monthly lease on the statement of activities. Now, all leases must also show a lease liability and right-of-use asset (leases within contracts/service agreements) on their statement of financial position. Note: In-kind rent is not included in the new lease standard. However, if the nonprofits lease is at least 50% less than the rent paid by others tenants for the same square footage, the nonprofit will need to consider both ASC Topic 842 and the ASC Subtopic 958-605, Not-for-Profit Entities Revenue Recognition.
With this change, FASB hopes to enhanced transparency. The inclusion of lease assets and liabilities on the statement of financial position provides stakeholders, including donors, grantors, and the public, with a more accurate representation of a nonprofit's financial position. It allows for better assessment of an organization's overall financial health, potential obligations, and lease-related risks.
ASC Topic 842 has brought about significant changes in lease accounting practices. Nonprofits need to understand the implications of the new standard to ensure compliance, maintain transparency, and provide accurate financial information to stakeholders.