In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02 – Leases (Topic 842), which contains substantial changes in the accounting for leases by lessees: organizations which lease assets. The new lease accounting guidance will require lessees to record an asset and liability on the statement of financial position for lease terms longer than 12 months. Current accounting guidance requires only capital leases to be recognized in this manner. However, ASU 2016-02 will now require operating leases to be presented on the balance sheet as well. Essentially all leases are covered by this standard, including leases for vehicles, office space, equipment, and the like. Enhanced financial statement disclosures surrounding leases will also be required as part of the standard. Accounting for leases by lessors, the owners of leased assets, will remain mostly unchanged.
When is the new guidance effective?
Public companies have already implemented ASU 2016-02 – Leases (Topic 842), as it went into effect for fiscal years beginning after December 15, 2018. For all other organizations, the ASU is effective for fiscal years beginning after December 15, 2020 (years ending December 31, 2021, for organizations on the calendar year). This current effective date for other organizations has been delayed one year from the original effective date due to implementation complexities. Early implementation of the standard is permitted for all entities.
Why did FASB decide to make the change?
There are a few reasons for the change in lease accounting. In general, the main objective of ASUs issued by FASB is to provide financial statement users with higher-quality information through enhanced financial reporting. It is believed this objective will be achieved by moving lease rights (assets) and obligations (liabilities) to the balance sheet, as this presents a “truer” financial position of the lessee. In many instances, lease obligations are very significant future cash outlays for an organization; with current presentation required only as a footnote disclosure, they could easily glance over. The new guidance also further explains the definition of a lease to address practice issues that have been experienced.
The FASB website contains several educational resources with supplementary information relating to this new standard. At Forge Financial and Management Consulting, we also have access to several excellent resources to assist with any questions or concerns surrounding the implementation of the new lease standard for your organization. Organizations should become familiar with the new standard and begin planning for its implementation if that process has not yet started. Stay tuned for future articles on leases, including those on the new lease accounting standard.