By: Andrew Roffe, Staff Accountant
The Financial Accounting Standards Board’s (FASB) new lease Accounting Standard Update (ASU) is fast approaching and will bring a major change to lease accounting. The ASU presents challenging issues for management accountants, predominantly accountants with large lease portfolios. The new standard will also require organizations to recognize the leases on the balance sheet– assets and liabilities –for the rights and obligations created by those leases. For non-public companies and other organizations, the ASU will take effect with fiscal years beginning after December 15, 2019 and with interim periods within fiscal years beginning after December 15, 2020.
FASB issued the standard in February 2016 with the goal to improve financial reporting about lease transactions. The ASU affects all organizations that lease assets such as real estate, airplanes, ships, constructions, and manufacturing equipment. The ASU will require disclosures to help investors and other financial statement users by providing more transparency into the leases effects on cash flows. The new guidance will require lessees to record leases with terms of more than 12 months. Currently, GAAP only requires capital leases to be reported on the balance sheet.
However, the accounting for organizations that own the assets leased will remain mostly unaffected from current GAAP. The slight improvements that the ASU does contain is to bring into line lessor accounting model with the lessee accounting model and with the updated revenue recognition guidance issued in early 2014.
This undertaking began in 2006 when the FASB and the International Accounting Standards Board (IASB) began working on a joint project to improve the financial reporting of leasing activities. FASB and the IASB conducted widespread outreach with diverse groups that included meetings with prepares and users of financial statements, public round tables, preparer workshops, and three issued documents for public comment.
FASB Chair Russell G. Golden stated, “When the new FASB and IASB leases standards take effect, they’ll provide investors across the globe with more transparent, comparable information about lease obligations held by companies and other organizations.”
Look for more information on this topic from Holbrook & Manter in future posts. In the meantime, please reach out to us with any questions you may have.