The FASB recently issued its new accounting requirements for leases. FASB Accounting Standards Update 2016-02 is effective for public companies, 11-K filers, and certain nonprofits for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. All others must follow suit a year later—for fiscal years beginning after December 15, 2019. Anyone may early implement the requirements.
The new standard classifies all leases as either finance or operating. But, all lessees must report both assets and liabilities for leases whose terms are longer than 12 months.
Accounting used by lessors will remain largely unchanged from current generally accepted accounting principles (GAAP). The standards do make some targeted improvements, update revenue recognition requirements, and add disclosures.
The new standard will cause major changes in lessees’ balance sheets (or statements of financial position). Current GAAP does not require assets and liabilities to be recognized for most lessees. Under the new standard, all lessees must report in their balance sheets a “right-of-use” asset, representing the right to use the underlying asset during the lease term, and a liability to make lease payments over the lease term. Recognition, measurement, and presentation of expenses and cash flows in the lessees’ other financial statements won’t change significantly.
Transition to the new lease accounting will be required using the “modified retrospective” approach, under which the FASB has established a number of “practical expedients” that companies may apply to identify and classify leases that began before the effective date of the new requirements.
International Accounting Standards
Lease accounting has been a joint project of the FASB and the International Accounting Standards Board since 2006. The IASB issued its final standard last month.
What Should I Be Doing NOW?
For many, this new standard will add assets and liabilities to a lessee’s balance sheet. If you are a lessee, it’s time to work with your financial institution to revise any financing arrangements that will be affected by changes in reported ratios of your company’s assets or liabilities. Otherwise, you may find that your company is in violation of loan covenants when the new standards are effective.
For more information on how this standard will affect your business, contact your UHY LLP partner.