5 Key Facts about the New FASB Leases Standard
What is a lease? And how should it be reported on a balance sheet? While your clients may not have spent much time pondering those questions in the past, the answers will take on new importance for them when a new Financial Accounting Standards Board standard on Leases becomes effective. While it’s true that the final guidance generally does not depart from existing GAAP as much as some earlier FASB proposals on this topic, practitioners should be prepared for significant changes in how all organizations that have lease assets—including private entities and not-for-profits—will account for leases. As practitioners begin to educate themselves on the guidance, here are five critical issues to keep in mind.
- Lessees must now recognize operating lease assets and liabilities on the balance sheet. This is the most significant change, since it will require all organizations and their CPAs to take a different approach to lease accounting. Before this standard, U.S. GAAP only required this type of recognition for capital leases. Operating lease amounts were generally shown in the financial statements as rent expense on the income statement and in disclosures to the financial statements. In implementing the new guidance, entities will have to reconsider the ways they identify lease arrangements.
- The difference between a service contract and an operating lease will be important. Practitioners may be called on to help entities distinguish between the two, since organizations typically would not be required to recognize assets and liabilities related to a service contract.
- The lease term matters. Lessors are only required to recognize lease assets and liabilities for leases with terms of more than 12 months. When a lease has a shorter term, a lessee can elect not to recognize lease assets and lease liabilities, if it’s reasonably certain that the lessee will not exercise any option to buy the asset. The lessee must recognize expense for these leases generally on a straight-line basis over the lease term.
- The standard will have a broad reach. Affected leased assets include all property, plant and equipment, which might include anything from real estate and manufacturing equipment to the office printer.
- Some things will remain the same. As was the case under previous guidance, the way that a lessee recognizes, measures and presents lease-related expenses and cash flows will depend on whether it is a finance or operating lease. In addition, the accounting for lessors will also be relatively unchanged, but practitioners should prepare for potential challenges when accounting for significant variable lease payments.
For public companies and some not-for-profits and employee benefit plans, the standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other organizations, the standard is effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. Early application is permitted.
Given the meaningful accounting changes involved, we’re urging practitioners to inform themselves and their clients early about what the standard will mean for their organizations. Fortunately, there’s a wealth of implementation assistance available. The AICPA Accounting for Leases website for the new guidance, Accounting Standards Update 2016-02, includes a practice aid, accounting brief and an overview video. In addition, the PCPS Center for Plain English Accounting (CPEA) has developed valuable implementation resources for its members. The CPEA is issuing a series of detailed implementation reports and conducting webinar tutorials on the new lease standard, focusing on the impact to private companies. Now’s the time to learn more about the new leases standard so that you’re ready to apply it when it becomes effective.
Bob Durak, CPA, CGMA, Director- Center for Plain English Accounting, American Institute of CPAs.
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