This is very simply when using Cradle, input the lease!

Once you Cradle has calculated the balances for ASC 842, the next step is to compare that to the current non-GAAP accounting and make the necessary adjustments.

When making the comparison, you should consider the following:

1 Cradle recognizes the right of use asset and lease liability: The first thing you will realize is if you want to post a simple journal entry about debiting the right of use asset and crediting lease liability. The two balances will not be equal. This is to be expected. That's because the amortization schedules are different. The difference is due to one of the balances incurring a higher lease expense. This difference is the balancing entry.

2 If you have booked the lease payments as an expense, they will not tie to the lease expense in Cradle. It is a common area of confusion to think the lease payments made for the period, e.g. year, will equal the lease expense. However, as per the requirements of ASC 842 and accounting for an operating lease, that's not the case.

Deloitte, in their ASC 842 guide, A Roadmap to Applying the New Leasing Standard on p.340, has a great example that articulates this point:

We've also formula linked this calculation, which you can refer to here. But, again, you can see the lease payments do not equal the asset reduction, which is the lease expense for an operating lease.

By posting this journal entry you balances will be compliant with the new lease accounting standard as that specific point int time you choose to, for example December 31, 2022.

In this example, we'll go through a scenario to true up non-GAAP lease accounting to comply with ASC 842. So in this example will compare non-GAAP lease accounting with ASC 842 and do the necessary journal entries.

In the above example, here are the balances in Cradle, this can be access in the Overview tab and then click Audit Schedule:

Here are some of the figures:

The two critical balances are the opening balance of $23,057.48 and the closing balance of December 31, 2022, at 12,219.37, which is the opening balance as of January 1, 2023.

The amortization of the right-of-use asset will look like this:

The critical balance of the right-of-use asset is the closing balance on 31 December 2022 is 11,919.37.

Lease expense incurred for 2022.

Establishing the lease liability & ROU asset

Payment made

Amortization charge relating to the right of use asset (2022-01-01 to 2022-12-31)

Interest expense on the unwinding of the lease liability (2022-01-01 to 2022-12-31)

You will notice that the ASC 842 journals are a lot more complicated. However, from a new account perspective, it's only the lease liability and right of use asset that need to be created. As a result, lease payment and lease expense are consistent across the previous lease accounting standard and ASC 842.

Hint

A common area of confusion with ASC 842 operating leases is the expectation that there is an interest and amortization income statement impact. That's not the lease. For an operating lease, there's only a "single lease cost" impact on the income statement.

The treatment is detailed explicitly in ASC 842-20-25-6. However, it's confusing. For example, for the lease liability calculation to work, you must calculate interest! The key is that the interest is classified as a lease expense instead of an interest expense.

On the other hand, a finance lease incurs an interest and amortization expense. If you're curious to learn more about how accounting differs between an operating and finance lease under ASC 842, refer to the article The Difference Between Calculating an Operating Lease and a Finance Lease Under ASC 842.

ASC 842 closing balances as at December 31, 2022 are:

Step 1 Recognize the lease liability and right of use asset as at December 31, 2022

Bringing the lease liability and right of use asset on balance sheet at December 31, 2022. You can get this figure by running Cradle's balance sheet report at December 31.

Step 2 Post balancing amount

Because the right of use asset and lease liability, does not equal which is expected, this journal entry does not balance.

As per ASC 842, an additional $300 lease expense must be incurred, which is the balancing amount. So the complete journal entry is:

Complete true-up journal for the lease to be compliant with ASC 842 at December 31, 2022

Getting an operating lease compliant with ASC 842 post-transition, e.g., 12 months after the adoption of the standard, results in an added complexity. The additional challenge arises when journals have been posted not in compliance with ASC 842 and the lease payments expensed to the income statement.

If that's the case, the processes follow two steps:

1) Input the lease into Cradle

2) Compare Cradle's journals to the non-GAAP expensed journals

3) Perform a true-up to correct the accounting to match Cradle's balance sheet

A shortcut can be to enter the lease into Cradle, run the balance sheet report, and the difference between the Lease liability and ROU asset is the balance figure amount for the journals.