This Is How CFOs Deal With Embedded Leases Within The Enterprise

This Is How CFOs Deal With Embedded Leases Within The Enterprise

By CFO Tech Outlook | Thursday, September 26, 2019

The recognition of the embedded leases by itself is a tough feat. But to handle those present within the company needs the employee to go the extra mile. 

FREMONT, CA: Financial Accounting Standards Board (FASB) ’s latest lease accounting has affected a long way in relation to balance sheets for all types of entities. With more enterprises reporting financial obligations worth more than billions of dollars, the new lease accounting can clarify.

The requirement of large sums to be balanced on sheets, in addition to the new standard has resulted in causing difficulties for those who prepare it. The preparers also struggle to detect and extract data from several lease contracts placed everywhere to ensure compliance with new rules. Although it sounds difficult for the preparers, the worst is yet to come. 

The new standard, which is coded under FASB ASC topic 842, leases—the contracts that are not identified or labeled as leases, maybe “arrangements that contain a lease.” The existence of a lease is validated when the vendor’s equipment is considered to be linked with the purchase of goods or the delivery of a service. The insights and in-depth evaluation of these arrangements in which leases may be hidden in plain sight, has posed a significant challenge for several preparers.

At present, Topic 842 is set straight with recognition and criteria for an embedded lease. The contract involves a lease when the right to control is transferred. The transfer includes the utilization of the asset for a definitive time period in exchange for some considerations. The contract also includes the right to leverage any economic benefits from the asset. 

It is primordial to make an impeccable presentation for the stakeholders about Topic 842. It not only includes the finance and accounting departments but also the supply chain, purchasing, operations, and information technology. It creates an environment of pre-screening and evaluation of embedded leases, detected with the contracting personnel in the company. 

The company can develop a quality-control program with the finance and accounting people who are well-versed with Topic 842. The recognition of how difficult the quantification is for embedded leases is unlike the simplicity of the real estate leases.

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