The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) (collectively, the Boards) have completed deliberations on new standards that significantly change the accounting for leases. The plan requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets.
The new standard could affect companies’ decisions about whether to lease or buy assets
Under the current accounting model, a company applies a classification test to determine the accounting for the lease arrangement: Some leases are classified as capital leases (e.g. equipment lease) whereby the lessee would recognize lease assets and liabilities on the balance sheet. Other leases are classified as operating leases (e.g. Office lease) whereby the lessee would not recognize lease assets or liabilities on the balance sheet.
The existing operating lease model has been criticized for failing to meet the needs of users of financial statements because it does not always provide a faithful representation of leasing transactions.
Core Principles of New Standards
The new standard will require companies that lease assets; referred to as “lessees”, to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases.
Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than twelve (12) months. Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease.
Unlike current GAAP which requires only capital leases to be recognized on the balance sheet the new ASU will require both types of leases to be recognized on the balance sheet.
Who is Affected by the New Guidance
Leasing is an important activity for many companies, whether a public or private company, or a not-for-profit organization.
The new ASU affects all companies that lease assets such as real estate, airplanes, ships, and construction and manufacturing equipment.
Effective Date for New Lease Standard
- For public companies, the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Thus, for a calendar year company, it would be effective January 1, 2019.
- For all other organizations, the ASU is effective for fiscal years beginning after December 15, 2019 and for interim periods within fiscal years beginning after December 15, 2020.
Early application will be permitted for all organizations.
We hope this blog provided useful and valuable insight on the new lease standard. For more information and insight email us at [email protected] or contact us at (301) 974-4568
