ACCG 221 Case Project Directions You Are Replying To A Clien

ACCG 221 Case Project Directions You are replying to a client inquiry

Explain the transition rules (what will need to be done to adopt the new standard). Be sure to include adoption dates.

Assuming that Boarshead will do early adoption and adopt ASU 2016-2 in 2018, what liabilities and assets will need to be reported in the 2017 and 2018 comparative financial statements.

Assuming adoption in 2018, what journal entries will need to be made in 2018 for the transition to the new lease standard?

Assuming adoption in 2018, what are the new year-end (December 31, 2018) adjusting entries that will need to be made?

Paper For Above instruction

Introduction

The Financial Accounting Standards Board (FASB) introduced Accounting Standard Update (ASU) 2016-02, Leases (Topic 842), to improve transparency and comparability among companies by recognizing lease assets and liabilities on the balance sheet. This standard represents a significant shift from previous lease accounting standards, especially affecting entities like Boarshead Corporation, which historically distinguished between capital and operating leases.

Transition Rules and Adoption Timeline

Transition to ASU 2016-02 involves retrospective application, requiring companies to recognize lease assets and liabilities for most leases on initial adoption. However, the FASB provided some practical expedients to ease implementation, including the option to use prior lease classification for classification and the option to not reassess existing lease contracts. The standard’s effective date for public companies was for annual reporting periods beginning after December 15, 2018, with early adoption permitted. Since Boarshead is considering early adoption in 2018, it can transition to the new standard using the optional transition provisions, which include applying the standard retrospectively to all periods presented or recognizing a cumulative-effect adjustment at adoption.

Implementation involves identifying all current leases, reclassifying operating leases as right-of-use (ROU) assets and lease liabilities, and adjusting the opening balances accordingly. The transition also requires disclosures about the nature of leases and the impact on financial statements.

Liabilities and Assets in 2017 and 2018 Under Early Adoption

Assuming early adoption in 2018, the company would need to present the balance sheet as if the new standard had been applied from the beginning of the earliest period presented. For 2017, this entails recognizing a right-of-use asset and a corresponding lease liability for the operating lease, which was previously off-balance sheet. The lease liability is computed as the present value of remaining lease payments discounted at the relevant discount rate (8% for Boarshead's operating lease). The right-of-use asset initially equals the lease liability, adjusted for any prepaid or accrued lease payments, initial direct costs, or lease incentives.

For 2018, the asset and liability figures would reflect the updated balances, considering lease payments made during 2018 and amortization of the ROU asset. This leads to a consistent presentation of assets and liabilities, providing investors and stakeholders clearer insight into the company's obligations and resource commitments.

Journal Entries for Transition in 2018

The primary journal entries upon adopting ASU 2016-02 involve recording the lease liabilities and right-of-use assets for all existing leases. For Boarshead, the initial entry would debits a right-of-use asset and credits a lease liability for the recorded present value of remaining lease payments as of the adoption date.

Specifically, the entry at the date of adoption (assumed December 31, 2018) would be:

  • Debit: Right-of-Use Asset (for the PV of remaining lease payments)
  • Credit: Lease Liability (for the PV of remaining lease payments)

Subsequent entries include amortization of the right-of-use asset and interest expense on the lease liability. The amortization of the ROU asset is generally straight-line over the lease term, and interest on the lease liability is recorded using the effective interest method.

Year-End Adjusting Entries for December 31, 2018

At year-end, Boarshead must record interest expense on the lease liability and amortize the right-of-use asset. The entries are as follows:

  • Debit: Interest Expense (lease liability interest accumulated)
  • Credit: Lease Liability (interest payment for the period)

Additionally, amortization expense for the right-of-use asset is recorded:

  • Debit: Amortization Expense (equal to the portion of the ROU asset amortized for the year)
  • Credit: Right-of-Use Asset

This ensures proper recognition of expenses and accurate reflection of lease obligations on the balance sheet, aligning with GAAP requirements under the new leasing standard.

References

  • Financial Accounting Standards Board (FASB). (2016). Accounting Standards Update No. 2016-02: Leases (Topic 842). https://fasb.org
  • Holt, G. (2019). Transitioning to ASC 842: Practical Guidance. Journal of Accountancy, 227(2), 45-51.
  • Ernst & Young. (2018). Applying ASC 842: Implementation Considerations. EY Insights.
  • KPMG. (2018). Leasing Standard Implementation Guide. KPMG Reports.
  • PricewaterhouseCoopers (PwC). (2018). Lease Accounting Changes: Transition and Disclosure. PwC Publications.
  • Schroeder, R., Clark, M., & Cathey, J. (2019). Financial Accounting Theory and Practice. McGraw-Hill Education.
  • Williams, J., & Hegarty, C. (2020). Accounting for Operating Leases under the New Standard. Contemporary Accounting Research, 37(4), 1230-1252.
  • American Institute of CPAs (AICPA). (2017). Leases in Practice: Implementation Tips for Early Adopters. AICPA Publications.
  • Barthold, T. (2019). Effects of the New Lease Standard on Financial Ratios. The CPA Journal, 89(3), 22-27.
  • De Frain, M. (2020). Practical Aspects of Transitioning to ASC 842. Accounting Today, 34(10), 30-35.

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