The Financial Accounting Standards Board (FASB) has dispensed an Accounting Standards Update (“ASU”) 2016-02 Leases (Topic 842). This convergence project regarding lease accounting standards which they worked on with the International Accounting Standards Board (IASB) for over a decade, aims to ease the difficult reporting process for organizations that lease everything from housing to jets.

What will be covered by ASU?

Both capital and operational leases will be treated the same under the ASU, where before, GAAP required only capital leases to be recognized on lessee balance sheets.  Here are a few of the key changes to look for:

Finance leases, a lessee is required to do the following:

  • Recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the balance sheet.
  • Classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows.
  • Recognize interest on the lease liability separately from amortization of the right-of-use asset in the statement of operations.

Operating leases, a lessee is required to do the following:

  • Recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis.
  • Recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the balance sheet.
  • Classify all cash payments within operating activities in the statement of cash flows.

Other Changes

For companies leasing, the requirements now include measuring the capital gain earned from the use of leased equipment. This is on top of the standard requirement to document all recognized assets with longer than 12 month terms of lease. A lessee is allowed to make an accounting policy election by class of underlying assets that are not to recognize lease assets and lease liabilities.  If a lessee makes this election, it should recognize lease expense for such leases generally on a linear basis over the term of the lease.  There was little change to the lessor’s requirements.

Amendments in ASU 2016-02 are active for fiscal years beginning after December 15, 2018 and including interim periods within those fiscal years, for any of the following:

  • Employee benefit plan that files financial statements with the U.S. Securities and Exchange Commission (SEC).
  • Public business entities
  • Not-for-profit entities that have issued, or are a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over the-counter market.

For all other entities, the amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.  Early application of the amendments in ASU 2016-02 is permitted for all entities.

To read more on the subject, please visit: www.accountingtoday.com or www.journalofaccountancy.com.