What Lessees Need to Know About Proposed Changes in Lease Accounting
Last week we provided you with an overview of proposed changes to lease accounting. Today, in this second of four blogs, we are going to take a look at what lessees need to know about these changes to the current standards, which are proposed in a FASB issued exposure draft.
Recognition and Measurement
Leases will no longer be classified as an operating lease or a capital lease. The proposed new standards recognize all leases similar to the current recognition of capital leases. On the balance sheet, the lessee would recognize a right-of-use asset and a liability at the present value of discounted future lease payments. In subsequent periods, the lease liability should be recognized at amortized cost. The right-of-use asset would be equal to the liability to make lease payments plus any costs incurred by the lessee related to the lease. The lessee would then amortize the right-of-use asset and measure the asset at amortized cost in subsequent periods. On the income statement, the lessee would recognize interest expense related to the liability, the amortization of the right-of-use asset, and any changes in the liability.
Presentation in the Financial Statements
On the balance sheet, the right-of-use asset and the lease liability should be shown separate from other assets and liabilities. The amortization of the right-of-use asset and interest expense should be shown separately from other expenses on the income statement or in the notes to the financial statements. Lease payments should be classified as financing activities on the cash flow statement and shown separately from other financing cash flows.
Transition to the New Standards
On the date of initial application of the proposed new guidance, the lessee should remeasure all outstanding leases. A lease liability should be recognized at the present value of the remaining lease payments. The right-of-use asset should be measured at the amount of the related liability.