Understanding the Essence of FASB ASC 842: Small Business Edition
FASB ASC 842 has reshaped the way companies account for leased assets, aiming for greater transparency by bringing almost all leases onto the balance sheet. While this clarity serves investors and stakeholders well, smaller businesses can find it difficult to navigate. After years of managing leases primarily as off-balance-sheet items, these enterprises now face new data-gathering exercises, system changes, and process overhauls. However, with a bit of planning and the right tools, small to mid-sized firms can adapt without derailing their day-to-day operations. Ultimately, the standard offers a chance not only to comply with regulations but also to gain a clearer sense of where money is going—and why.
The Challenges for Small Businesses
Smaller companies don’t always have the luxury of extensive accounting teams or sophisticated software, making any major regulatory change feel like a heavy lift. The process of identifying leases scattered across different departments or tucked into vendor contracts can be surprisingly time-consuming. Meanwhile, a tight budget can hinder efforts to invest in specialized lease accounting tools. This is where efficiency becomes crucial: a methodical, phased approach can keep you from getting overwhelmed. Identify your most critical lease contracts first—like office space or essential equipment—before moving on to smaller or short-term leases. Clear communication among stakeholders, from finance to operations, ensures nobody hoards information that could derail compliance later.
Gathering the Right Data
Under ASC 842, you’ll need to capture details beyond just monthly payments. Everything from renewal clauses to termination options affects the calculation of right-of-use assets and lease liabilities. If you’re unaccustomed to such precision, start by assembling the fundamentals: the full text of each lease, key financial terms, and relevant dates. Getting this information into a spreadsheet or database is often the first milestone. If you find the data collection too unwieldy, consider basic lease management software. While many small businesses shy away from additional tech investments, an inexpensive tool can pay off by automating repetitive tasks and reducing the risk of manual errors. Over time, accurate data also reveals patterns in your leasing habits, guiding better decisions in future negotiations.
What to Look For in Lease Contracts
| Contract Element | Why It Matters | Impact on ASC 842 |
|---|---|---|
| Lease Term | Determines asset & liability duration | Affects discount rate & amortization |
| Renewal Options | Can extend usage beyond initial term | Potentially increases liability |
| Variable Payments | Increases complexity in calculations | Must capture triggers for extra cost |
| Residual Guarantees | Shifts risk to the lessee | Could lead to larger reported liabilities |
Understanding these elements helps small businesses avoid surprises when they run the final numbers. For instance, a seemingly harmless renewal option could inflate the balance sheet if deemed “reasonably certain” to occur. Documenting these details consistently keeps finance teams confident about compliance and offers a clearer perspective on overall leasing obligations.
Short-Term vs. Long-Term Planning
A frequent pitfall for smaller firms is treating ASC 842 as a one-time project. True, the initial rush to get everything on the balance sheet can be intense. But once that hurdle is cleared, you’ll still need to manage ongoing processes like renewing, modifying, or terminating leases. If you let data slip through the cracks, next year’s financial statements could be riddled with inaccuracies. The good news is that once a reliable system is in place, lease tracking becomes a routine task. Regular check-ins—perhaps quarterly—allow you to see if the leases still meet your operational needs or if it’s time to explore different options. With a proactive approach, small businesses can keep this new compliance environment from escalating into a constant fire drill.
Making ASC 842 Work to Your Advantage
While FASB ASC 842 can feel like a burden, it also forces you to reassess every lease with fresh eyes. That real estate location you’re rarely using? Maybe it’s time to negotiate a sublease or cut it loose. That fleet of delivery trucks costing more than it should? Perhaps it’s worth exploring shorter lease terms or a different supplier. By treating compliance as a springboard for strategic improvement, smaller businesses can uncover cost savings that outweigh the hassle of the transition. Additionally, having precise, up-to-date lease data can strengthen your position in discussions with potential investors or lenders. After all, nothing builds trust like a well-documented snapshot of your financial commitments.
Paving a Smooth Path Forward
Navigating ASC 842 doesn’t require a big-business budget. It does, however, demand thoughtful organization, consistent data gathering, and a willingness to collaborate across departments. Small businesses that view the standard as an opportunity to refine leasing practices—and boost financial clarity—can emerge stronger on the other side. By sticking to a sensible timeline, using whatever resources fit your scale, and keeping an eye out for operational improvements, you’ll transform this accounting challenge into a stepping stone for better financial management. And while the road to compliance may be bumpy, the end result—a more transparent and strategic handle on your leases—is well worth the effort.
