FASB issued ASU 2018-11, which contains targeted improvements to Topic 842 Leases. Among the targeted improvements are a transitional method for reporting during the adoption period and clarification on separating components of a contract for lessors as they relate to FASB's new revenue guidance Topic 606 Revenue from Contracts with Customers. Topic 842 significantly alters current lease accounting under US GAAP. The new standard removes the current approach of classifying leases as either capital or operating leases. For most leases defined under current GAAP as operating leases, Lessees will be required to record a right of use asset and corresponding liability on their balance sheet. Certain exceptions exist for short term leases. Companies will also have to consider all of the costs associated within the lease agreement and the likelihood of any potential renewal when determining the value of the right of use asset.
The new lease standard is effective for public companies for fiscal years beginning after Dec. 15, 2018. For private companies, the standard is effective for fiscal years beginning after Dec. 15, 2019 and interim periods within fiscal years beginning after Dec. 15, 2020. Early application is permitted.
As this is one of the most significant changes in accounting in recent years, it is important to be aware of the potential impact and get ahead of the application of Topic 842. While the preceding points are not exhaustive, they are just a few of the items that will be considered when applying the new accounting standard. For more information, contact us in one of our many locations.