The Financial Accounting Standards Board (FASB) recently issued new accounting guidance for entities that lease assets. In an effort to reduce off-balance sheet accounting of operating leases, the new guidance will measure and recognize all leases, with a term of greater than twelve months, on the balance sheet. The lessee will now classify a lease as either a finance lease or an operating lease based on certain criteria, but in both instances the lessee will recognize an asset representing its right-of-use to an underlying asset and a lease liability representing its obligation to make lease payments during the lease term.
This is a core principle change from current generally accepted accounting principles (GAAP), and it may cause significant increases to an entity’s assets and liabilities on the balance sheet.
Lessor accounting will remain relatively unchanged from current GAAP.
Things to consider: Since substantially all leases will be measured and recognized on the balance sheet, entities will need to evaluate and review all contracts to ensure that appropriate processes are in place to accumulate a complete and accurate listing of leases to report. Depending on the volume, complexity of contracts, availability of data, and so forth, this process could be time consuming and labor intensive. A review of current and potential future debt arrangements will also need to be evaluated for potential impacts to debt covenant calculations. Early communication with stakeholders regarding these changes will be imperative for successful implementation of this new standard.
Disclosure requirements: Lessees will be required to disclose qualitative and quantitative information about its leases. Some example disclosure requirements include a general description of the lease, the existence of terms and conditions of options to extend or terminate the lease, any restrictions or covenants imposed by the lease, significant judgements made by management, such as determination of the lease discount rate, and identification of the lease by classification, such as finance, operating, or short-term lease.
Effective date: Entities should be proactive in evaluating and gathering necessary information for current leases as the implementation date is fast approaching. For example, calendar year end entities will present the new guidance effective January 1, 2019. If comparative financial statements are presented, the entity will restate the prior year and recognize all previous GAAP operating leases greater than twelve months as of January 1, 2018, by recording a right-ofuse asset and a lease liability based on the present value of the remaining minimum rental payments.
This is a very general summary of the new lease accounting guidance. Please refer to FASB Accounting Standards Update No. 2016-02, Leases for additional information.
If you would like assistance in evaluating and reviewing this information, please contact our Albany office at (229) 883- 7878 or our Atlanta office at (404) 220-8494.
