Oops! Something went wrong while submitting the form.
Get a Demo
See your data in HubiFi < 2 days
Learn what practical expedient means in accounting and how it can simplify complex standards, making your financial reporting more efficient.
Implementing new accounting standards can be a headache. They're complex, time-consuming, and often require specialized knowledge. But what does practical expedient mean in accounting, and can it help? These officially recognized shortcuts can streamline applying complex rules like ASC 842 and IFRS 16. This article explains practical expedient meaning, explores its impact on financial reporting, and breaks down the different types available. We'll also cover potential challenges and offer practical advice for implementation. So, if you're looking to simplify compliance and reduce the burden on your team, keep reading.
Practical expedients are options that simplify applying new accounting standards. Think of them as shortcuts—perfectly acceptable ways to ease the burden of implementing complex rules, especially in lease accounting. They let companies streamline their approach, offering relief during the often-challenging transition to new regulations. For example, the new lease accounting standard, ASC 842, introduces practical expedients that simplify how companies account for their leases, providing consistent options. This can be a huge help for businesses dealing with numerous lease agreements. For a deeper look into transitioning to the new standard, check out this helpful resource on lease accounting transitions.
In accounting, a practical expedient offers a simplified way to apply complex standards, like a shortcut. These expedients aren’t loopholes—they’re officially recognized options that make compliance more manageable without significantly altering the overall financial picture. Think of them as pre-approved simplifications. Practical expedients are especially helpful during transitions to new standards, such as the shift to the new lease accounting rules under ASC 842 and IFRS 16. These transitions can be resource-intensive, and practical expedients offer a way to streamline the process. They help companies adapt to new requirements more efficiently, reducing the strain on their accounting teams.
Practical expedients offer a valuable balance between simplifying accounting processes and maintaining accuracy. They’re designed to make applying standards easier without compromising the reliability of financial reports. Using practical expedients can free up time and resources, allowing your team to focus on other critical tasks. However, it’s crucial to use them correctly. Improper application can lead to errors, so careful consideration and a clear understanding of the rules are essential. Before selecting any practical expedients, assess your company’s specific reporting needs, the types of leases you hold, and the available accounting resources. Carefully evaluate the potential impact on your financial statements and document your choices for transparency. If you’re unsure, seeking expert advice from a firm like HubiFi can help you make informed decisions and ensure a smooth transition. For more insights on streamlining your financial processes, explore our blog or schedule a demo.
Several key features distinguish practical expedients:
Simplified Processes: Practical expedients often remove the need to reassess existing contracts. This means you might not have to re-examine whether past or current contracts even contain leases, their classifications, or the initial direct costs. This simplification saves significant time and effort. For more on how practical expedients simplify lease accounting, read this.
Flexible Application: Companies have choices when applying practical expedients. They can apply them to individual leases, specific asset groups (like vehicles), or as a blanket policy for all leases. This flexibility allows businesses to tailor their approach to their specific needs and resources. For a more detailed explanation of practical expedients and their application, see this article on accounting expedients.
Smoother Transitions: The main goal of a practical expedient is to make the shift to new accounting standards less disruptive. They help companies comply with updated regulations without major headaches, allowing for a more manageable implementation process. Learn more about practical expedients and transitions.
Practical expedients offer companies legitimate shortcuts—ways to simplify the implementation of new accounting standards without sacrificing accuracy. They're especially helpful when transitioning to new standards, like the lease accounting standards under ASC 842 and IFRS 16. These expedients reduce the complexity and burden of compliance while still adhering to the core principles of the standards.
Both the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) recognize the value of practical expedients. They understand that implementing new standards can be resource-intensive, and these expedients are designed to ease the transition. They offer flexibility in how certain transactions are accounted for, which streamlines the implementation process. For example, when transitioning to ASC 842, a company might elect not to reassess lease classification. This saves significant time and effort, especially for companies with many leases. This shared perspective underscores the importance of balancing rigorous accounting with practical application.
While practical expedients simplify the transition, they are carefully structured to maintain the integrity of the accounting standards. They aren't meant to compromise the quality of financial reporting, but rather to make the shift from old methods to new standards smoother. Think of them as approved shortcuts, not loopholes. They still require adherence to the fundamental principles of the standards, ensuring reliable financial reporting. This careful balance ensures that companies can benefit from simplified processes without compromising the accuracy and transparency of their financial statements.
A key benefit of practical expedients is their ability to speed up the adoption of new standards. For example, the "hindsight" practical expedient allows companies to look back and use existing information to determine lease liabilities and right-of-use (ROU) asset balances. This avoids complex calculations and estimations, leading to a more efficient transition and faster compliance. By reducing the workload and simplifying the process, practical expedients encourage timely adoption. This allows companies to realize the benefits of the new standards more quickly, such as improved transparency and comparability of financial information. Ultimately, this faster adoption contributes to a more robust and reliable financial reporting landscape.
Lease accounting can get complex, but thankfully, there are practical expedients to simplify the process. These expedients, allowed under both ASC 842 and IFRS 16, offer ways to reduce the burden of implementing and maintaining these standards. Let's explore some common practical expedients available.
This package combines three expedients that can significantly streamline lease accounting, especially during the initial transition to the new standards. It's an all-or-nothing deal—you either elect all three or none.
Choosing this package can significantly simplify the transition to the new lease accounting standards. For a deeper dive into the potential impacts of these choices, explore our insights on lease accounting.
One of the most helpful practical expedients under ASC 842 lets you skip reassessing lease classifications. This means you don't need to re-evaluate whether leases previously classified as operating leases under ASC 840 now qualify as finance leases under the new standards. This can be a huge time saver, especially for companies with numerous lease agreements. This can free up your team to focus on other important tasks. For a deeper dive into available practical expedients, our blog offers additional insights.
Identifying embedded leases within contracts can be tricky. Thankfully, a practical expedient simplifies this process, allowing companies to bypass reassessing existing contracts for embedded leases. This means you may not need to examine whether a contract contains a lease or determine its classification. This not only saves time but also reduces the complexity of implementing the new lease accounting standards. To learn more about simplifying lease accounting with practical expedients, this resource offers valuable information.
Initial direct costs, such as commissions and legal fees, can add another layer of complexity to lease accounting. A practical expedient simplifies this by allowing companies to capitalize these costs for leases that began before the new standards were in place. This streamlines the transition by avoiding the immediate expensing of these costs. For more on practical expedients and their impact on lease accounting, explore the HubiFi blog.
The hindsight practical expedient allows companies to use the knowledge they have at the commencement date of a lease to determine the lease term. This means you can incorporate information about lease renewals or terminations that occurred after the commencement date but before the transition to the new standards. This can be particularly helpful for leases with multiple renewal options where the actual exercise of those options provides clarity on the lease term. This expedient can simplify the process of determining the lease term and reduce the need for complex estimations. To see how HubiFi can help manage your lease data, learn more about our pricing and services.
The hindsight practical expedient lets companies use the information available at the lease commencement date to determine the lease term. This means incorporating information about lease renewals or terminations that occurred *after* the commencement date but *before* transitioning to the new standards. This is particularly helpful for leases with multiple renewal options, where actually exercising those options clarifies the lease term.
For example, imagine a lease starting in 2020 with two optional one-year renewals. If, by the 2023 transition to the new lease accounting standards, your company already renewed the lease once, you could use this information to establish a three-year lease term instead of estimating the likelihood of future renewals. This simplifies the process, grounding it in actual events rather than projections.
Like any accounting tool, the hindsight expedient has advantages and disadvantages. Understanding these helps you decide if it's the right approach for your business.
This expedient simplifies determining the lease term and reduces complex estimations. By leveraging existing knowledge about lease renewals and terminations, the hindsight expedient can lead to more accurate financial reporting and a smoother transition to new accounting standards. It provides more certainty and reduces potential future adjustments. For companies with numerous leases, this translates to significant time and cost savings. If you’re looking to streamline data integration and reporting, explore HubiFi's integration solutions.
While offering significant advantages, the hindsight expedient can be challenging if companies lack comprehensive records of lease renewals or terminations. Inaccurate or incomplete data could lead to lease term miscalculations, potentially impacting financial statements. Additionally, if circumstances significantly change after the transition date, the initial lease term determined using hindsight might no longer reflect the actual lease arrangement, potentially requiring later adjustments. For more insights on managing complex accounting data, browse the HubiFi blog.
Under ASC 842, separating lease components (like land and buildings) is required. However, the land easement practical expedient simplifies this process. If a contract includes both a lease component and a non-lease component (like an easement for access to land), this expedient allows you to treat the entire contract as a lease. This avoids the complexities of separating and accounting for the different components individually. This can be particularly useful for companies with numerous land easements, saving them time and resources. Explore how HubiFi's integrations with existing accounting software can streamline your lease accounting processes.
The land easement practical expedient, while helpful, isn't a free-for-all. It has specific conditions. Primarily, it applies when a contract includes both a lease component (like a building) and a non-lease component that's an easement for access to that same land. The easement and the leased property must be intrinsically linked. This expedient helps avoid the often-complex process of separating these components for accounting purposes. For companies managing multiple properties and easements, this simplification can save significant time and resources.
Let’s say a retail company leases a building and the contract also includes an easement allowing them access to that specific land for parking or deliveries. Typically, the company would need to account for the building lease and the land easement separately. However, using the land easement practical expedient, they can treat the entire contract as a single lease. This simplifies the accounting process considerably. Instead of two separate accounting treatments, they have one. This streamlined approach is particularly beneficial for businesses with numerous similar arrangements.
Practical expedients are designed to make implementing new accounting standards easier, saving companies time and money. They offer options that simplify the transition, making it less of a burden. For example, imagine having to reassess every lease your company holds—a practical expedient might allow you to skip that for certain lease types, freeing up your team to focus on other critical tasks. This can translate into significant cost savings, especially for companies with numerous leases. For a deeper look at transitioning to new standards, explore resources like those offered by PwC. They offer valuable insights into managing the complexities of lease accounting.
The transition methods outlined in ASC 842 include practical expedients that smooth the shift from old lease accounting methods to the new standards. Instead of a jarring change, these expedients allow for a more manageable adoption process. Companies can choose to apply these expedients by individual lease, by asset class (like grouping all your real estate leases together), or across the board as a company-wide policy. This flexibility empowers organizations to manage their reporting efficiently. For further guidance on navigating these transitions, Deloitte's lease accounting guide offers a comprehensive overview.
Practical expedients not only simplify compliance but also reduce the effort required to adhere to new standards. They can significantly decrease the complexity of data collection and system configuration, which is essential for accurate reporting. Think of it this way: if a new standard requires extensive historical data, a practical expedient might allow you to use readily available information instead of digging through archives. This streamlined approach can have a substantial impact on how data is managed and reported, ultimately leading to more efficient processes. LeaseQuery offers resources and software solutions to help manage lease accounting data and ensure compliance. Exploring their offerings can provide valuable insights into optimizing your data management processes.
This section explores the practical expedients available under both ASC 842 and IFRS 16, highlighting their similarities, differences, and effects on your financial statements. Grasping these nuances is key for a smooth transition and ongoing compliance.
Both ASC 842 and IFRS 16 offer practical expedients to simplify lease accounting. One key similarity is the option to bypass reassessing existing lease classifications. This means you might not need to re-evaluate whether a contract is or contains a lease, saving you time and resources during implementation. Another shared expedient is the ability to use hindsight. This lets you use information available at the transition date to determine the lease term and assess any impairment of your right-of-use (ROU) assets. This can simplify calculations and provide more accurate starting points.
Both ASC 842 and IFRS 16 offer a practical expedient for short-term leases. This allows companies to exclude leases with a term of 12 months or less from the balance sheet. This can significantly reduce the administrative burden, especially for businesses with a high volume of short-term leases, like equipment rentals or short-term office space. Instead of recognizing a right-of-use asset and lease liability, these short-term leases are expensed as incurred, similar to how operating leases were treated under previous standards. This simplification frees up resources, allowing accounting teams to focus on more complex lease arrangements.
Another helpful practical expedient, particularly under IFRS 16, is the low-value asset exemption. This allows companies to exclude leases of low-value assets from capitalization. While the specific threshold may vary, it's generally around $5,000. This means items like laptops, tablets, or small office equipment can be expensed rather than recognized as right-of-use assets. This simplifies accounting for these common items and reduces the administrative burden associated with tracking and reporting on numerous low-value assets. For high-volume businesses dealing with numerous assets and complex revenue streams, automating these processes can be crucial. Consider exploring HubiFi's automated revenue recognition solutions for a more streamlined approach.
Many contracts include both lease and non-lease components. For example, a contract for a copier might include the lease of the copier itself (the lease component) and a service agreement for maintenance (the non-lease component). ASC 842 and IFRS 16 offer a practical expedient that allows companies to combine these components and treat them as a single lease component. This simplifies the accounting process by avoiding the need to separate and allocate payments between the lease and non-lease elements. Managing these combined components effectively requires robust data integration. HubiFi offers services to integrate disparate data sources, ensuring compliance and providing real-time analytics for better decision-making. Learn more about HubiFi's integration capabilities.
While some overlap exists, key differences remain between the practical expedients offered by each standard. One notable difference lies in how private companies determine lease classification under ASC 842. They can rely on the written terms within the lease agreement, even if those terms lack legal enforceability, offering flexibility. Another distinction relates to the incremental borrowing rate. Under IFRS 16, if a lease's implicit interest rate isn't readily determinable, companies can use the incremental borrowing rate for those leases, simplifying lease liability measurements. Understanding these differences is crucial for accurate compliance.
IFRS 16 offers some welcome relief with practical expedients that simplify footnote disclosures. For example, you aren’t required to disclose the total cash flow related to leases, which significantly streamlines your financial statements. Plus, IFRS 16 allows exemptions for certain disclosures on short-term leases and leases of low-value assets. This means less detailed information for these specific lease types, making your reporting cleaner and more efficient. By using these practical expedients, you can stay compliant with IFRS 16 while reducing the administrative burden. This allows you to focus on material information relevant to the users of your financial statements. For more detailed information on practical expedients and transition requirements under IFRS 16, Visual Lease offers helpful resources.
Choosing to use practical expedients directly affects your financial reporting. For instance, using the hindsight expedient can clarify your initial ROU asset and lease liability balances. This contributes to more accurate financial statements from the start. Consistently applying practical expedients across all your leases can also streamline the transition and improve the overall efficiency of your lease accounting. However, carefully consider the potential long-term effects of each expedient on your financial reporting. For a deeper look into optimizing your financial processes, explore HubiFi's automated revenue recognition solutions and schedule a demo to discuss your specific needs.
Deciding to use practical expedients requires careful planning and consideration. Here's what to keep in mind:
Not all leases are created equal. Some represent significant financial obligations, while others are less impactful. Companies should evaluate the materiality of leases when deciding to apply practical expedients. This can be done on a lease-by-lease basis, by class of asset (like grouping all your company vehicles together), or as a general accounting policy election. This flexibility allows companies to tailor their approach based on the significance of each lease. For example, a small office lease might not warrant the same level of scrutiny as a large manufacturing facility lease. Understanding materiality helps focus your efforts where they matter most. For more information on materiality in accounting, check out this article on practical expedients.
Practical expedients are tools in a toolbox—not every tool is right for every job. It's crucial for companies to choose practical expedients that align with their specific circumstances. These options are designed to ease the transition to new accounting standards, such as ASC 842. The package of expedients, for instance, typically includes not reassessing whether existing contracts contain leases, lease classification, or initial direct costs. Carefully consider which expedients offer the most benefit while maintaining compliance. This resource on ASC 842 provides further guidance on practical expedients.
Imagine a retail company with hundreds of store leases transitioning to ASC 842. Applying the package of three practical expedients (no reassessment of lease classification, lease term, or initial direct costs) would save them from individually reviewing each lease agreement. This frees up resources for other critical transition tasks. For more on how practical expedients simplify lease accounting, check out this helpful resource.
Now, picture a smaller company with fewer, more complex leases. They might choose to use the hindsight expedient for leases with uncertain renewal terms, leveraging information gained since the lease commenced. This leads to more accurate lease terms and financial reporting. This article offers a deeper look at tailoring practical expedient application.
Strategic practical expedient application depends on a company’s specific needs and lease complexity. The goal? Balance simplification and accuracy, ensuring a smooth transition to new standards while maintaining sound financial reporting. Learn more about practical expedients and transitions here.
While practical expedients simplify the accounting process, companies must also ensure they maintain accuracy in their financial reporting. It's a balancing act. For instance, the hindsight practical expedient allows companies to have a clearer understanding of their beginning lease liability and right-of-use (ROU) asset balances, which can enhance the accuracy of their financial statements. However, over-reliance on expedients could mask important details. Strive for a streamlined process that still reflects the true financial position of your company. This article offers a deeper look at balancing practical expedients and accurate reporting under ASC 842.
While practical expedients offer valuable simplification, it's crucial to understand their potential challenges and risks. Overlooking these factors could lead to inaccurate financial reporting and future compliance issues.
One significant impact of using certain practical expedients, like the package of three under ASC 842, is a potential increase in the Right-of-Use (ROU) asset and lease liability on your balance sheet. This occurs because these expedients can classify more leases as finance leases, increasing both assets and liabilities. While not inherently negative, this shift can impact key financial ratios and debt covenants. Understanding these implications is crucial for maintaining a healthy financial profile. For more details on ROU assets and lease liabilities, see our resources on lease accounting.
Applying practical expedients correctly requires a thorough understanding of ASC 842 and IFRS 16. Misinterpretation or inconsistent application can create compliance problems during audits. Clearly documenting your choice of expedients and their rationale is essential. Talk with our team to learn how HubiFi's automated solutions can help ensure compliance while using practical expedients.
Implementing new accounting standards and adopting practical expedients can disrupt existing workflows. This might involve changes to data collection, system integrations, and even internal controls. If not managed effectively, these disruptions can cause errors and inefficiencies. HubiFi's integrations with common accounting software can minimize disruptions and streamline your lease accounting.
Practical expedients can influence how lease information appears in your financial statements. This can affect how stakeholders, including investors and lenders, view your company's financial health. Transparency and accuracy in reporting are paramount. Explore HubiFi's pricing to discover how our solutions support accurate and efficient financial reporting.
Implementing practical expedients can feel like a balancing act. While they simplify things, they also present potential challenges. Here’s how to approach these challenges strategically:
Before implementing any practical expedient, carefully weigh the pros and cons within your specific financial context. Consider the potential effects on key financial metrics, such as your EBITDA and debt ratios. Thorough documentation of your decision-making process—why you chose a specific expedient or opted not to use one—is essential for transparency and a clear audit trail. This documentation will also be invaluable for future reference and strong internal controls. For a deeper understanding of practical expedients and their impact, explore this helpful resource on practical expedients in accounting.
Using robust lease accounting software can significantly streamline the implementation of practical expedients and help mitigate associated risks. These tools automate many of the complex calculations and processes involved, ensuring compliance with relevant accounting standards like ASC 842 and IFRS 16. They also offer a centralized platform for managing lease data, simplifying reporting and analysis.
Managing lease accounting under ASC 842 or IFRS 16 can be complex. HubiFi offers solutions to streamline the process and leverage practical expedients effectively. Our automated platform helps you navigate the intricacies of these standards, ensuring compliance while saving you valuable time and resources. We understand the challenges businesses face, from data collection and system integration to maintaining accuracy and transparency in financial reporting. Here’s how HubiFi simplifies lease accounting:
HubiFi simplifies the complexities of lease accounting, reduces the burden on your team, and ensures accurate and transparent financial reporting. Learn more about HubiFi and our mission to support business success.
Don’t hesitate to seek guidance from experienced accounting advisory partners. They can offer valuable insights into the nuances of practical expedients and help you understand the potential implications of each choice. Getting expert advice before making decisions ensures your chosen approach aligns with your overall financial strategy and minimizes the risk of unintended consequences. For more information on practical expedients and transition requirements, resources like this one from Visual Lease can be helpful. Consider scheduling a data consultation to discuss your specific needs.
Consider applying practical expedients on an asset-class basis. This approach allows for more tailored implementation, especially when dealing with a diverse portfolio of leased assets. By grouping similar assets, you can assess materiality more effectively and choose expedients that best reflect the specific characteristics of each asset class. LeaseCrunch offers further insights into understanding practical expedients for lease accounting. This targeted approach can lead to more accurate financial reporting while still leveraging the simplification offered by practical expedients.
Accounting standards are always evolving, and so are the practical expedients available to companies. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) continually evaluate how well existing expedients work and consider new ones to address emerging challenges in financial reporting. This ongoing process aims to simplify accounting processes while keeping financial information accurate and transparent. Staying informed about these developments is crucial for companies to maintain compliance and optimize their accounting practices. For more information on current accounting standards updates, explore the FASB website.
The ever-changing business and finance landscape requires regular reviews and updates to accounting standards. As new transactions and financial instruments emerge, standard setters like the FASB and IASB must adapt to provide clear guidance. This often leads to new practical expedients designed to ease the implementation of these updated standards. Companies should proactively monitor these changes and assess how new expedients might affect their financial reporting. Subscribing to updates from professional accounting organizations, like the American Institute of CPAs (AICPA), can help you stay ahead of the curve.
The Financial Accounting Standards Board (FASB) introduced ASU 2023-01, a practical expedient designed to simplify lease accounting for private companies. This update eases the transition to the new lease accounting standards under ASC 842, offering a welcome reprieve for businesses navigating these complex regulations. Many private companies can continue using their existing lease classifications, avoiding a time-consuming and potentially costly reassessment. This streamlined approach allows them to maintain compliance while focusing on their core operations.
One of the key benefits of ASU 2023-01 is the option to forgo reassessing whether existing contracts contain leases. This can significantly reduce the workload associated with implementing the new standards. As HubiFi notes, this often includes not reassessing embedded leases, lease classifications, or initial direct costs. This flexibility is especially valuable for private companies, which may have fewer resources than larger organizations to dedicate to complex accounting changes. For more guidance on practical expedients and how they can benefit your business, explore the HubiFi blog. You can also schedule a demo to see how HubiFi’s automated solutions can further simplify your revenue recognition processes.
Practical expedients primarily aim to simplify accounting processes, saving time and resources. However, this simplification shouldn't compromise reporting integrity. It's a balancing act. Over-reliance on expedients could hide important financial details or lead to inconsistencies in reporting. Companies must carefully evaluate the implications of each expedient before adopting it, ensuring it aligns with their overall financial reporting objectives. A thorough understanding of the relevant accounting standards, such as ASC 842 for leases, is essential for making informed decisions about applying practical expedients. Schedule a data consultation to discuss how HubiFi can help you navigate these complexities and ensure accurate and efficient revenue recognition.
What exactly is a practical expedient?
It's basically an approved shortcut when implementing new accounting standards. They simplify things without compromising the overall accuracy of your financial reporting. Think of them as options that make adopting new rules less of a headache.
Why would a company use a practical expedient?
Primarily to save time and money. Implementing new accounting standards can be complex and resource-intensive. Practical expedients streamline the process, freeing up your team to focus on other important tasks. They also make the transition to new standards smoother and less disruptive.
Are there any downsides to using practical expedients?
While generally beneficial, practical expedients require careful consideration. Some can significantly impact your balance sheet, potentially increasing both assets and liabilities. Also, misapplying them can lead to compliance issues during audits. It's crucial to understand the specific implications of each expedient before using it.
How do I know which practical expedients to use?
It depends on your specific situation and the accounting standard you're implementing. Assess the materiality of your leases – not all leases are equally important. Choose expedients strategically, considering their potential impact on your financial statements. When in doubt, consult with an accounting expert. They can provide tailored guidance based on your company's needs.
Where can I find more information about practical expedients for my industry?
Professional accounting organizations and advisory firms offer valuable resources. Check out the websites of organizations like the AICPA and consult with accounting experts specializing in your industry. They can provide up-to-date information and tailored advice. Also, consider scheduling a consultation with a company like HubiFi to discuss how they can help you navigate the complexities of new accounting standards and implement practical expedients effectively.
Former Root, EVP of Finance/Data at multiple FinTech startups
Jason Kyle Berwanger: An accomplished two-time entrepreneur, polyglot in finance, data & tech with 15 years of expertise. Builder, practitioner, leader—pioneering multiple ERP implementations and data solutions. Catalyst behind a 6% gross margin improvement with a sub-90-day IPO at Root insurance, powered by his vision & platform. Having held virtually every role from accountant to finance systems to finance exec, he brings a rare and noteworthy perspective in rethinking the finance tooling landscape.
Copyright © 2025 HubiFi | All rights reserved.
