In 2015, the Financial Accounting Standards Board (FASB) drafted an updated lease accounting standard to recognize lease liabilities on the balance sheet with corresponding right-of-use assets. In May 2013, The FASB issued a proposed Accounting Standards Update, Leases (Topic 842). Since the proposed standard was issued, FASB deliberated proposals in the May 2013 Exposure Draft. Recently, the Board updated the Standard for two items: an exception to the lease classification test and an effective date for adoption of the standard.
According to the FASB minutes from its last meeting in November 2015, the FASB decided to provide an exception to the lease classification test whereby entities will not consider the lease term criterion when performing the lease classification test for leases that commence "at or near the end" of the underlying asset's economic life. The Board also decided that the final leases standard should include implementation guidance that one reasonable approach to determining the applicability of this exception would be to conclude that a lease that commences in the final 25 percent of an asset's economic life is "at or near the end" of the underlying asset's economic life.
In addition, the FASB decided that for (1) public business entities, (2) a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an-over-the-counter market, and (3) an employee benefit plan that files or furnishes statements with or to the SEC (collectively referred to as "public business entities"), the final leases standard will be effective for fiscal years beginning after Dec. 15, 2018. For private companies, the standard will be effective for annual periods beginning after Dec.15, 2019. Early application will be permitted for all entities upon issuance of the final standard.
The FASB voted 6-1 to send its proposed leases standard for final drafting. The new lease standard includes significant changes in the recognition of leases for lessee accounting, which could result in substantial additions of lease obligations to companies' balance sheets.
For more information on the new lease standard, please contact your local UHY LLP professional, or visit us on the web at www.uhy-us.com.
By Michael A. Baum, CPA