New FASB Leases Standard Brings Transparency to Lessee Balance Sheets

Published on March 23, 2016

Lessees will be required to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months under a new financial reporting standard issued by FASB

Accounting Standards Update (ASU) No. 2016-02Leases, will apply to both types of leases—capital (or finance) leases and operating leases. Previously, GAAP has required only capital leases to be recognized on lessee balance sheets.

As under current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease for lessees primarily will depend on its classification as a finance or operating lease:

  • For capital or finance leases, lessees will recognize amortization of the right-of-use asset separately from interest on the lease liability.
  • For operating leases, lessees will recognize a single total lease expense.

For both types of leases, lessees will recognize a right-of-use asset and a lease liability. Lessor accounting under the new standard will remain similar to lessor accounting under current GAAP.

The new standard does contain targeted changes that are intended to align lessor accounting with the lessee accounting model and the revenue recognition standard issued in 2014.

Improvements in transparency and comparability will result from the new standard.

The ASU also will require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative information.

The standard will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018. For all other organizations, the ASU on leases will take effect for fiscal years beginning after Dec. 15, 2019, and for interim periods within fiscal years beginning after Dec. 15, 2020. Early application will be permitted for all organizations.

As financial statement preparers begin to read the final standard for the first time, companies may want to consider:

  • Starting right away. Companies can get started by putting together a team to work on implementation. The team may need to include a wide range of functions, including finance and accounting and legal personnel.

  • Reviewing legal agreements and debt covenants. Particularly for private companies, changes to the balance sheet may affect contractual agreements or loan covenants. Many times these agreements have “frozen GAAP” clauses that state that they will be based on GAAP at the time they are signed, but  it’s worth thinking about these types of effects beyond the accounting.

  • Thinking carefully before purchasing a complex or costly system. FASB constructed the standard with the goal that companies would be able to leverage their existing systems to perform the necessary accounting and reporting.

  • Evaluating leasing processes. While changing the accounting for leases, companies may want to consider their leasing processes. For example, if their lease processes are decentralized, companies may wish to centralize them for improved efficiency or cost-effectiveness.

  • Reaching out for help. If preparers are struggling or having difficulty understanding the standard, they may contact FASB.

    (Source:  AICPA - CPA Letter Daily - Journal of Accountancy- February 26, 2016)