US GAAP – Changes to ASC 842 Leases – Tips for Universities (2024)

With financial year-ends and UK GAAP audits fast approaching, it may be easy to overlook University requirements to prepare US GAAP financial statements as a result of US student loan threshold breaches.

Having experienced the challenges of adopting the changes to ASC 842 (Leases) for some of our university clients last year, James Thurkettle, shares some top tips on how Universities can best prepare for it this year, if this is their first US GAAP conversion since the standard updates.

ASC 842 is the new lease accounting standard and demonstrates a significant variance to how leases are treated when compared with FRS 102 treatment, seeing the majority of operating leases brought onto the balance sheet, in an attempt to increase transparency of liabilities arising from leasing arrangements. This standard became effective for private and non-profit organisations with year-ends beginning after 15 December 2021 and therefore was applicable to most UK universities from the year ended 31 July 2023 US GAAP conversions.

So, why does it matter?

Under ASC 842, many operating leases that have been historically expensed under FRS102 will be recorded on the balance sheet as right-of-use assets and lease liabilities under US GAAP.

What are we seeing with our clients?

It’s important not to downplay both the work involved for this change and the level of documentation required. As a minimum, we recommend:

• that individual lease agreements are reviewed including specific considerations around lease break clauses or options to extend the lease, if applicable
• ensure details around lease prepayments, direct costs and lease incentives are clearly documented
• identification of any variable lease payments and their terms are summarised

Break clauses for leases become more relevant for ASC 842, as when measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. This may result in the “lease period” being treated differently under FRS 102 vs US GAAP.

As a firm believer in the saying “fail to prepare, prepare to fail”, the key to ensuring a smooth US GAAP conversion this year will be in the preparation. There is real value in ensuring that the documentation is available and organised, and discussions are had sooner rather than later. In our experience, most of our review work on leases can either be done pre-year end or close to the year-end, when your focus is firmly on the reporting requirements of the UK audit, to save time and effort later in the process.

If you have any questions in relation to your own US GAAP reporting commitments, please do not hesitate to get in touch with our dedicated team by calling 0330 058 6559 or emailing [email protected]