Many of our accounting friends know about ASC 840 and that ASC 842 is coming to private companies starting next year. Here at Sudozi, we’ve built a free, easy-to-use template for lease accounting calculations to help simplify your processes. This template works best if you’re already using Sudozi, but it functions as a standalone template as well.
For those of you who aren’t as familiar, for ASC (Accounting Standards Codification) 840 and 842, monthly income statements need to average out the monthly rent expense for the duration of the lease, and every month should reflect that same expense no matter what you actually pay.
For example, if you sign a three-year lease and get the first three months free (great job on the negotiations) but pay $1000 for the remaining 33 months, you can’t just show $0 for your rent expense in those first three months. You need to show a rent expense of $916.67 ($1000 x 33 / 36 total months) - even for the first three months when you don’t pay anything.
Why straight-line rent expense? Although there are several objectives for these rules, one major driver is helping companies compile financials such that they reflect real changes in the business vs. the nature of lease payments. If a company had negotiated two years of really low rent with a huge increase later on, it would look as if company performance was significantly changing at the end of that first two-year period; in actuality, nothing has really changed. Since the company is liable for the entire lease, the expense each period is averaged out over the lifetime of the lease contract.
Sudozi's vendor management features help customers digitize their contracts and gain visibility to their lease schedules - because who wants to dig through that 30-page document every time? In addition, we’re starting to leverage the data by automating various workbooks, like your deferred rent workbook (We’re sure you have one!).
For younger companies who have not gone through an audit yet, this is something you’ll want to pay attention to. Save time, money, and stress--you don’t want to get stuck on ASC 840 or 842 during your audit.
Take a look at the workbook we’ve compiled to help with ASC 840 deferred rent calculations. What did we miss? We would love to hear your thoughts!
Special thanks to Deon Peters (Director of Accounting, SwagUp), Deirdre Mullen (Director of FP&A, Remote), and Roberto Tolosa (BizOps, KeepTruckin) for inspiration and help with this post.
A quick note: For rent expense, you may need to factor in tenant improvements allowances (decrease rent), lease negotiation costs (increase rent) or other adjustments. Your calculation may also need to be tweaked to reflect the date you got access to the property and not necessarily the lease start date.
If you had a lease start before the private company 842 effective date (1/1/22), it’s possible for part of your lease to be calculated under ASC 840 and part under ASC 842. More on 842 to come!