Big Changes to Lease Accounting Coming Soon
The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) 2016-02 Leases, intended to improve financial reporting about leasing transactions. The ASU will affect all companies and other organizations that lease assets such as real estate, airplanes, and equipment. If you need more help than this article provides, call Chris Perrino at 513-929-6034, or email email@example.com.
The ASU requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases if terms are greater than 12 months. Consistent with current generally accepted accounting principles (GAAP), the recognition, measurement, and presentation of expenses and cash flows by a lessee will depend on its classification as a finance or operating lease. The difference between current GAAP and the ASU is that both types of leases will be required to be recognized on the balance sheet. A right-of-use asset will be recorded representing the right to use the underlying asset for the lease term, and a lease liability will be recorded to recognize a liability to make lease payments. Both of these items will be measured at the present value of the future lease payments.
Additional disclosures will also be required that will allow investors and other users to better understand the amount, timing, and uncertainty of cash flows arising from leases. Included in these disclosures are both qualitative and quantitative requirements that provide additional information about amounts recorded.
The accounting for lessors will remain largely consistent with current GAAP but does include improvements to align lessor accounting with lessee accounting as well as the new revenue recognition guidance.
The ASU will take effect for public companies for fiscal years beginning after December 15, 2018. For all other entities, the ASU will take effect for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. Early application will be permitted for all organizations.
Please contact Chris Perrino if you require additional information, or call 513-929-6034.