Case Study: ASC 842 - Leases

Issue:
Our client was going through the first-time implementation of ASC 842 - Leases, and required a retrospective adjustment to the year-end audited financial statements and prospective lease workbooks for the next fiscal year.

Context:

Our client, a real estate organization, did not opt for an early adoption of ASC - 842. As a result, they were required to adopt the standard with a retrospective adjustment to the comparative (audited) figures for their year end.

The agreement included a lease and sub-lease arrangement,  and the resultant right of use asset and lease liability needed to be accurately quantified while considering any financial lease and sublease implications.

Additional challenges around determining the fair market value of the lease at lease inception and at the end of the term were also incurred, as determining market values required judgement and proper justification.

Lastly, historical operating leases and their impact needed to be assessed and properly and accurately eliminated based upon their classification within the updated standard.

Solution:

Solaris was able to leverage previous experience in implementing ASC 842 and apply it to our clients nuances.

We used historical and current real estate values to establish fair market value at the inception and end of the lease term. This included looking at property tax valuation assessments, current market rates for similar properties in the vicinity, market growth rates, and other applicable variables.

We determined the lease internal rate of return, and prepared a lease schedule from the inception to the end of the lease term and prepared entries to record the impact of the updated lease standard under ASC 842.

Lastly, we walked the clients auditors through our workbooks and rational, successfully passing Big 4 review, while adhering to our clients audit timeline.

Summary:

Solaris presented the adjustments and applicable support to the CFO, Controller, and the external auditors. No corrective action was suggested by either of the stakeholders.

Solaris also provided the client with a workbook for prospective lease entries, allowing the client to easily record entries month over month.