FASB Lease Accounting Standards
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases, which can be found in the new Accounting Standards Codification (ASC) Topic 842. The issuance of the ASU marks the completion of the FASB’s lease project.
Reporting periods beginning after December 15, 2018. Public entities include:
- A public business entity;
- A not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed or quoted on an exchange or an over-the-counter market; and
- An employee benefit plan that files financial statements with the U.S. Securities and Exchange Commission.
All Other Entities
Reporting periods beginning after December 15, 2019. Early application is permitted.
Who will be Impacted?
Any entity that is party to a lease (either as the lessor or the lessee) is subject to the provisions of the new lease standard. The new standard does provide for limited scope exceptions. For example, this standard does not apply to leases of intangible assets, leases of biological assets (i.e. timber) or leases of inventory, among other things. Because leasing arrangements are so prevalent – leases of office space, office equipment, etc. – virtually every entity who prepares their financial statements in accordance with GAAP will be impacted by the new standard. The standard will most significantly affect entities who only have leases that are currently classified as operating leases.
What is Changing?
Under the new standard, the entity’s lease, which represents a right to control the use of identified property, plant or equipment for a period of time, will be reflected as an asset on the entity’s balance sheet. A corresponding liability, equal to the present value of the lease payments, is also reflected on the balance sheet.
When Should Planning Start?
Although the standard is not effective for most companies until 2020, it is important to identify the entity’s population of leasing arrangements, including leases embedded in other agreements, as early as possible. Whether a lease contains renewal or extension options will impact the application of the standard on the entity’s books. Additionally, an early review of the entity’s leases will provide the entity with time to negotiate practical changes to their leases before implementation of the new standard. Because the lease liability may affect an entity’s debt covenants, the entity should discuss the impact of the standard with its lenders.
What Should I Do Now?
The first step is to identify all the leases to which the entity is a party and review the provisions of the agreements in light of the new requirements. The next step would be to compute the amount of the lease asset and liability in accordance with the transition guidance within the standard. Finally, determine the effect of the standard’s requirements on other arrangements, especially debt agreements with financial institutions.