2022 Association Accounting and Tax Updates

Part 1: Accounting update

The biggest accounting change for associations in 2022 will be lease accounting, as 2022 is the year of required implementation of accounting standard ASC 842. In February 2016, the Financial Accounting Standards Board (FASB) issued new standards on leases – Accounting Standards Update (ASU) 2016-02. After several delays, the new standard is effective for associations for fiscal years beginning after December 15, 2021, which means it is effective beginning January 1, 2022, for associations with fiscal years that correlate to the calendar year. Recently the FASB indicated that the standard will not be delayed any further. While both lessors and lessees will be impacted, this article will focus on lessees since that is where most associations fall.

What is changing?
The most significant change is that most leases will now be recognized on the Statement of Financial Position as a result of the new standard. Under previous accounting guidance, operating leases, such as leases of office space, were expensed as the asset was utilized with no related asset or liability recorded. Capital leases (financing leases under the new standards) were included on the Statement of Financial Position. Under the new guidance, a right-of-use asset and accompanying lease liability will be recorded on the Statement of Financial Position for both operating leases and financing leases.

Does this apply to all leases?
While the standard does apply to all leases, associations with leases containing lease terms of 12 months or less can elect an accounting policy to exclude a lease asset and lease liability from the Statement of Financial Position. The lease term is considered to be the lease commencement date through the noncancelable date. If a renewal option is available and the lessee is reasonably certain to exercise that option, the renewal period should also be included in the lease term.

What is considered a lease?
Under the new accounting guidance, a lease is considered to be a physical asset which the lessee has the right to control use of for a period of time. This includes traditional leases for office space, vehicles or office equipment, but may also include nontraditional leases included in service agreements or other contracts. For example, if an association utilizes a third party for data storage and the contract grants exclusive use of a specific server, this will likely qualify as a lease. It is recommended that associations review all contracts to determine if any leasing arrangements may be included.

Financing lease vs. operating lease
Financing leases are defined as a lease where any of the following criteria are included in the contract:

• Lessee obtains ownership of the asset at the end of the lease term.
• An option exists for the lessee to purchase the asset and it is reasonably certain the lessee will do so.
• The lease term covers a major part of the asset’s useful life.
• The sum of the present value of lease payments is greater than or equal to the asset’s fair value.
• The asset is specialized to a point that is has no alternative use to the lessor at the end of the lease term.

Any lease that does not qualify as a financing lease is considered an operating lease.

How do I record the lease activity?
The initial entry to be recorded on the Statement of Financial Position is calculated as the present value of all lease payments over the lease term. If a discount rate is readily determinable in the lease agreement, that rate should be used to discount the payments to present value. If a rate is not determinable in the lease, associations should utilize the incremental borrowing rate the association would pay if financing the leased asset. Once the balance is recorded on the Statement of Financial Position, subsequent entries depend on the lease type. Lease expense for operating leases is recorded on a straight-line basis over the life of the lease. For financing leases, interest expense and amortization expense are both recognized by the lessee.

Other notes
Implementation of the new lease standard is complicated, and it is recommended that associations work with their accounting professionals to discuss the impacts of the standard, discuss materiality and ensure proper treatment. In addition to the Statement of Financial Position impacts noted above, several additional disclosures will be required in the financial statement footnotes.

Part 2: Tax update

The only significant tax change for associations is that the 990-T (Exempt Organization Business Income Tax Return) is now required to be electronically filed. There are limited exceptions to this requirement.