New Lease Accounting Standard Released

After 10 long years of deliberation, the Financial Accounting Standards Board (FASB) has issued an accounting standards update (ASU) related to accounting for leases.  The most significant changes affect accounting for operating leases by lessees.

What is Now Required?

The ASU requires lessees with leases of 12 months or more to record a right-of-use asset and liability related to the lease on the balance sheet, similar to the current standard for capital leases.  There will remain a distinction between a finance (formerly referred to as a capital lease) and operating lease, which determines the nature of expense and classification of cash flows, but both types will require a company to record an asset and liability.  The accounting for lessors remains mostly unchanged from current standards but aligns the accounting more closely to that of lessees and the new revenue recognition standards.  Lessees who enter into leases of 12 months or less can make an accounting election not to recognize lease assets and liabilities.  If the election is made, lease expense should be recognized on a straight-line basis over the lease term.

The table below identifies the difference in presentation between finance and operating leases in accordance with the ASU.  However, regardless of the type of lease, an asset and liability is recorded on the balance sheet.  The accounting for lessors remains mostly unchanged from current standards but aligns the accounting more closely to that of lessees and the new revenue recognition standards.

Finance Lease Operating Lease
Balance Sheet Asset and liability measure at the present value of future lease payments Same as finance lease
Income Statement Interest expense on lease liability and amortization of the right-of-use asset Lease expense on a straight-line basis over the term of the lease
Statement of Cash Flow Interest expense and variable lease payments classified as operating activities and liability payments classified as financing activities All cash flows classified as operating activities

 

What Does Not Qualify?

The ASU does not apply to the following types of leases:

  • Intangible assets
  • To explore for or use minerals, oil, natural gas, and similar non-regenerative resources
  • Biological assets, including timber
  • Inventory
  • Assets under construction

When Does it Take Effect?

The ASU is effective for public companies for fiscal years beginning after December 15, 2018 and for private companies after December 15, 2019, with early adoption permitted.  While it may seem as if there is plenty of time to understand and implement the new standard, the earlier you start the transition process the smoother implementation will be for your company.

There are many components of lease contracts to consider when determining the measurement of the lease asset and liability.  Contact an Anders advisor to assist with the transition.