On February 25, 2016, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) aimed to improve financial reporting of leasing transactions. This update affects all companies that lease assets such as real estate, airplanes, construction and manufacturing equipment. The most significant impact is that traditional operating leases will be on the balance sheet for the first time.
The new guidance responds to the requests from financial statement users for a more transparent view of an organization’s leasing activities. With updates such as this, there comes specific new rules for compliance.
We’ve provided a high-level overview of the new standard.
Lease Identification and Classification
With the new standard comes a new term – “finance lease”. A finance lease is what has historically been termed a capital lease. These types of leases have, and will continue to be shown on the balance sheet as a capital asset. The change comes with accounting for operating leases, which have historically been expensed as lease payments were paid.
The new standard requires capitalization and amortization of operating lease assets when the lease term is greater than 12 months. With this change comes new financial statement accounts such as a “right-of-use asset” and “lease liability” accounts.
Lease Recognition and Measurement
Leases must be analyzed and accounted for on a continual basis. With varying lease inception dates, terms and agreements, this task could seem daunting, and early planning is key. Companies should reassess their leases and design a tracking and monitoring system for those leases.
Additional items to note:
- Additional financial statement disclosures are needed in order to comply.
- Prior periods must be restated for comparative financial statements.
- The tax code is not impacted by these changes. Meaning, different treatment for books and tax.
- This update is effective for non-public entities for annual reporting periods beginning after 12/15/19 (calendar year-ends of 2020) with early adoption permitted.
As always, feel free to contact a specialist at BerganKDV with questions.