Lease Accounting – The Standard is Finally Here
Last year in this quarterly newsletter we had an article “Leases – Will we ever see a standard?” due to the questions that we were getting from clients on the proposed changes in lease accounting. Well, that question has finally been answered. On February 25, 2016, the FASB issued the much talked about revision to lease accounting. The IASB issued its new lease accounting standard on January 13, 2016, although there are significant differences from the FASB standards.
What do the new standards mean for you? Lessees will now be recognizing a right-of-use asset and a lease liability for a majority of their leases. Leases that meet a definition of a short-term lease will not have those requirements. The lease liability will be equal to the present value of lease payments and the asset will be based on the liability (although subject to adjustment for initial direct costs). We will still see leases being classified as operating or financing based on certain criteria. Those leases that qualify as operating leases will have straight-line expense implications while the financing leases will result in front-loaded expenses. As balance sheets start to include these lease assets and liabilities, you will also notice more extensive disclosures in the notes to the financial statements. You may notice that this transition could affect your debt covenants.
When will you be affected by these new standards? For non-public companies, the standard is effective for fiscal years beginning after December 15, 2019 and interim periods beginning the following year. Early adoption will be permitted.
What can you start to do? You can start by making sure that you have an appropriate system and process to gather and report all the leases you have. Make sure that the listing of leases is complete and accurate. We may be a few years away from implementation of the new standards, but getting a jump on knowing what you have for leases will lead to a smoother process and provide you a sense of the implications on the balance sheet.