How to assess the impact of ASC 842 leases on a UK entity when reporting to the group

‘Does a change to accounting for leases under US GAAP impact my UK entity?’ introduces ASC 842 leases and what this means to UK subsidiaries reporting to US parents. In this article, we take a closer look at what is needed to ensure a company is ready for reporting to the group.

Accounting for leases by a lessee – a summary

US GAAP

Leases accounted for under ASC 842 give rise to a right-of-use asset and a lease liability. ASC 842 retains a distinction between operating and finance leases. The total cost expensed to the profit or loss (interest and depreciation) in respect of operating lease is unchanged from the amount expensed to the profit or loss under ASC 840. This is achieved by adjusting the amount of depreciation to ensure the charge in the profit and loss account is consistent.

IFRS

There is no distinction between operating leases and finance leases in IFRS 16. All leases give rise to a right-of-use asset and a lease liability. Interest and depreciation are both charged to the profit or loss over the term of the lease.

UK GAAP

Operating leases are expensed to the profit or loss over the term of the lease.

What do I need to do?

Review and assessment

• Review of the relevant standards and identification of the key differences.
• Assessment of the key differences to identify those which are relevant to your group.
• Where applicable, identify the practical expedients that will be taken and the lease arrangements that fall within these.
• Identify the application steps needed to apply ASC 842 to the UK subsidiary’s leases or those needed to FRS 102 Section 20 to the US subsidiary’s leases.

Application – dependent on the outcome of your assessment, potential steps include:

• Review of all relevant lease arrangements to confirm if any arrangements are brought in to or are taken out of scope of the relevant standard.
• Identification of discount rates.

Accounting and reporting

This will include preparing all the necessary calculations and identifying and processing the necessary adjustments at consolidation to remove the GAAP differences.

Is there a way to manage the annual GAAP differences?

For an FRS 102 reporter, the application of ASC 842 will increase the number of GAAP differences it will need to adjust for before reporting to its group. It is expected that the accounting for leases under FRS 102 will change, but how this will look and when it will change is not yet known.

One way to minimise these GAAP differences is through the application of FRS 101 / IFRS.

Initial conversion to FRS 101 / IFRS is an extensive task; the approach suggested above in respect of ASC 842 will need to be carried for all relevant sections across FRS 102 and FRS 101 / IFRS. However, once the conversion has been completed, fewer GAAP differences to be adjusted each year would be expected.

When do I need to take action?

For some groups this may be an extensive task, dependent on the volume of lease arrangements concerned and the complexities of those arrangements. Therefore, starting this process as early as possible will help the group financial reporting for the first accounting period applying ASC 842 run smoothly.

Whether you require a GAAP assessment in respect of leases only or are considering a change to your reporting framework to minimise GAAP differences, RSM can help.

RSM has a national team of accounting and financial reporting experts across the UK. We can help with everything from a friendly chat to more formal review and assessments of differences or full implementations.

For further information please contact Nicola Whitmarsh, or your usual RSM contact.