WHAT ARE THE CORE PRINCIPLES OF THE NEW STANDARD?
The new standard will require organizations that lease assets— referred to as “lessees”—to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases.The new standard will require organizations that lease assets— referred to as “lessees”—to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases.
Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months.
Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease.
However, unlike current GAAP—which requires only capital leases to be recognized on the balance sheet— the new ASU will require both types of leases to be recognized on the balance sheet.
The ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements.
The accounting by organizations that own the assets leased by the lessee—also known as lessor accounting—will remain largely unchanged from current GAAP. However, the ASU contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014.
HOW WILL THE NEW GUIDANCE IMPROVE LEASE ACCOUNTING?
WHO WILL BE AFFECTED BY THE NEW GUIDANCE?Leasing is an important activity for many organizations—whether a public or private company, or a not-for-profit organization. It is a means of gaining access to assets, obtaining financing, and reducing an organization’s exposure to the risks of full ownership of the underlying asset.
The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, ships, and construction and manufacturing equipment.
WHEN WILL THE FINAL ACCOUNTING STANDARDS UPDATE BE EFFECTIVE?
For public companies, the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Thus, for a calendar year company, it would be effective January 1, 2019.
A public company is any organization that is any one of the following:
- A public business organization
- A not-for-profit organization 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
- An employee benefit plan that files or furnishes financial statements to the SEC
Early application will be permitted for all organizations.