Business Transparency and ASC 842- How The New Lease Accounting Standard Changes Things

business transparency and asc 842
Image source: Bridgepoint Consulting

Business transparency varies depending on what kind of business you own. Some businesses don’t mind the transparency as it aids in forming bonds and relationships with customers, especially if you’re in the B2B niche. Whereas other businesses are quite closed in terms of their business. They like to keep their accounts away from prying eyes and like to do business without that kind of information being available to the public, or to other businesses (like competitors). With ASC 842 lease accounting updates, if you don’t like transparency, you might be disappointed. Let’s look at why.

ASC 842: Less Transparency For The Right Reasons

If your business has any lease accounting commitments then you’ll need to follow ASC 842, the new lease accounting guideline set down by the FASB. ASC 842 governs how public and private businesses account for their leases on an ongoing basis. This could be a lease for a property, equipment, etc. Whereas previously a lot of lease transactions could be classed as off balance sheet items, now, they have to all be allocated to the balance sheet. It means that transparency in regards to your lease arrangements is non-existent.

Those looking to value your business, look at your lease liabilities and your overall financial position will have a better angle on what’s going on in your business. However, this is also applicable to your competitors…you’re on a level playing field if they also exist in the USA and follow US GAAP. So, the FASB has the right intentions in applying ASC 842 to the businesses of the USA. They want people on the same playing field. That said, it is something you might have to adjust to in due course.

ASC 842 Refresher: What Is It?

It’s simply a guidance that governs how businesses record their lease agreements. Previously, ASC 840 was the guidance everyone followed but now ASC 842 has been released. ASC 842 defines leases as contracts granting control of an asset for a specific amount of time, in exchange for payment. The majority of businesses will use a lease in the USA.

Is Business Transparency Good?

Business transparency can have both positive and negative impacts on a company. On one hand, transparency can increase trust and credibility with customers, investors, and stakeholders, which can lead to increased business opportunities and growth. On the other hand, transparency can also reveal sensitive information that may negatively affect the business, such as disclosing financial or operational issues. Overall, transparency is considered to be good for business when it is used strategically and appropriately to build trust and demonstrate accountability. In general, it is important for companies to strike a balance between being transparent and protecting their business interests.

How Your Business Can Appear More Transparent

There are a multitude of reasons, and we’ve laid them out below. Some might apply to your business, others may not, but they can all help you and your business appear more transparent and ultimately, appear better to do business with.

Here are some ways your business can appear more transparent:

  1. Be open and honest about company operations and policies.
  2. Provide regular updates and communicate openly with stakeholders.
  3. Make financial information publicly available.
  4. Respond promptly and transparently to customer inquiries and complaints.
  5. Publish a code of ethics and ensure employees adhere to ethical practices.
  6. Use social media and other online platforms to connect with customers and share information.
  7. Encourage employee feedback and involvement in company decision-making.
  8. Implement open and fair business practices, such as fair pricing and transparent supply chain management.
  9. Foster a company culture that values transparency and accountability.
  10. Continuously review and improve transparency efforts to maintain a positive reputation and build trust with customers and stakeholders.

That’s how your business can increase transparency. Remember, ASC 842 forces you to be more transparent but if you ride with it and go for more transparency as a whole, you’ll immediately appear like a better prospect with which to do business.

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