Leases

ACCOUNTING STANDARDS UPDATE NO. 2016-02, LEASES (TOPIC 842)

 

Overview


On February 25, 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842):
  • Section A—Leases: Amendments to the FASB Accounting Standards Codification®
  • Section B—Conforming Amendments Related to Leases: Amendments to the FASB Accounting Standards Codification®
  • Section C—Background Information and Basis for Conclusions
Read the Press Release introducing the Update.
 
The new guidance establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases.

To that end, the new guidance:
  1. Results in a more faithful representation of the rights and obligations arising from leases by requiring lessees to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases.
  2. Results in fewer opportunities for organizations to structure leasing transactions to achieve a particular accounting outcome on the statement of financial position.
  3. Improves understanding and comparability of lessees’ financial commitments regardless of the manner they choose to finance the assets used in their businesses.
  4. Aligns lessor accounting and sale and leaseback transactions guidance more closely to comparable guidance in Topic 606, Revenue from Contracts with Customers, and Topic 610, Other Income.
  5. Provides users of financial statements with additional information about lessors’ leasing activities and lessors’ exposure to credit and asset risk as a result of leasing.
  6. Clarifies the definition of a lease to address practice issues that were raised about the previous definition of a lease and to align the concept of control, as it is used in the definition of a lease, more closely with the control principle in both Topic 606, and Topic 810, Consolidation.
The new guidance affects any organization that enters into a lease, or sublease, with some specified exemptions. Because a lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration, this guidance does not apply to any of the following:
  1. Leases of intangible assets (see Topic 350, Intangibles—Goodwill and Other).
  2. Leases to explore for or use minerals, oil, natural gas, and similar nonregenerative resources (see Topic 930, Extractive Activities—Mining, and Topic 932, Extractive Activities—Oil and Gas). This includes the intangible right to explore for those natural resources and rights to use the land in which those natural resources are contained (that is, unless those rights of use include more than the right to explore for natural resources), but not equipment used to explore for the natural resources.
  3. Leases of biological assets, including timber (see Topic 905, Agriculture).
  4. Leases of inventory (see Topic 330, Inventory).
  5. Leases of assets under construction (see Topic 360, Property, Plant, and Equipment).

Effective Dates


The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for any of the following:
  1. A public business entity, as defined in generally accepted accounting principles (GAAP).
  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.
  3. An employee benefit plan that files financial statements with the U.S. Securities and Exchange Commission (SEC).
For all other organizations, the new guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

Early application is permitted for all entities.

At the July 17, 2019 meeting, the Board decided to add a project to its technical agenda to consider the effective dates for Topic 842, Leases (in addition to Topic 326, Financial Instruments—Credit Losses (referred to as CECL) and the recent amendments to Topic 815, Derivatives and Hedging).

The Board concluded that it has received sufficient information and analysis to make an informed decision on the perceived costs of the changes and that the expected benefits would justify the expected costs of the amendments in the proposed Accounting Standards Update. The Board directed the staff to draft a proposed Update for vote by written ballot on the proposed amendments regarding the effective dates for Leases (in addition to CECL and Hedging). The Board decided that the comment period for the proposed Update would be 30 days.

The proposed Update will discuss the Board’s decision to retain the existing effective date for Leases for (1) all public business entities, (2) not-for-profit bond obligors, and (3) employee benefit plans that file or furnish financial statements with the SEC, which is for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (effective January 1, 2019 for calendar year-end companies). The proposed Update also will address the Board’s decision to defer the mandatory effective date for Leases for all other entities by an additional year. Therefore, Leases would be effective for all other entities beginning after December 15, 2020 (January 1, 2021 for calendar year-end companies), and interim periods within fiscal years beginning after December 15, 2021 (January 1, 2022 for calendar year-end companies). Early adoption will continue to be allowed.

For learn more, read about the effective dates project.

 

To Learn More

  • Read FASB In Focus—a summary of the Update.
  • Read FASB: Understanding Costs and Benefits.
  • Watch Why a New Leases Standard? —a video featuring FASB Members Jim Kroeker and Hal Schroeder, and former FASB Member Tom Linsmeier.
  • Watch Putting Leases on the Balance Sheet —a video featuring former FASB Member Daryl Buck and former FASB Senior Project Manager Danielle Zeyher discuss how organizations that lease assets can apply FASB’s new guidance on leases.
  • Watch Leases: A Quick Example of the Display Approach —a video featuring former FASB Senior Project Manager Danielle Zeyher and FASB  Project Manager Lisa Kaestle that discusses the approach for recognizing operating leases on the balance sheet. This approach was specifically designed to allow preparers to leverage existing systems and processes.
  • Watch the FASB WebcastIN FOCUS: FASB Accounting Standards Update on Leases. The webcast provided an overview of the Update and the Board and staff answered questions submitted by viewers.
  • Read about the FASB’s post-issuance activities and amendments related to the amendments in Accounting Standards Update No. 2016-02, Leases (Topic 842). 

Have A Question?

Submit questions about the new requirements using our Technical Inquiry System.