The Lease Standard is (Finally) Here!Posted: February 29, 2016
On February 25, the FASB issued the revision to lease accounting that has been coming for over 10 years. Here are answers to the four most common questions I am asked about the new leasing standard.
What does it do?
The short answer is all leases will now be recorded on the balance sheet. The present value of the lease payments will be recorded as a liability and the entry will be balanced by the creation of a “right to use” asset. While a lease arrangement must include tangible assets, or the arrangement is not considered a lease, the asset that is created is not consider part of PP&E and is segregated from PP&E on the balance sheet or the notes to the financial statements. A lot of things don’t change under the standard. The definition of a lease, while more precise, is basically the same as today, as is the measurement of the lease term. Of course, as with any new standard today, there are a lot more disclosures than currently required for leases.
When does the accounting change take effect?
The standard is required to be adopted in 2019 (for public companies). Early adoption is allowed. While most companies do not usually adopt standards as significant as this one early, that may not be the case with the lease standard. There is significant potential interplay between the leasing standard and the new revenue standard. Because the new revenue standard is required to be adopted in 2018, I think many companies will at least consider early adoption of the leasing standard. Such a dual adoption would also allow companies to more quickly get through all of the “noise” from adopting two of the most significant accounting policy changes in most of our professional careers.
I’ve heard it’s different for companies following IFRS, is that true?
Both IFRS and GAAP will require all leases be recorded on the balance sheet, but the income statement treatment is another story. The IFRS only allows one method. To the IFRS, all leases are financings, so the income statement will reflect amortization on the right-to-use asset, as well as interest expense on the lease payable. This is basically how capital leases are treated today. In U.S. GAAP there will be two approaches to the income statement presentation of leases. The first approach, for those leases that are similar to capital leases today, the lease will be presented as a financing like IFRS requires. For leases that are similar to operating leases today, one straight-line expense amount will be recognized in operating expense in the income statement.
This is huge – why aren’t they doing something like the Transition Resource Group for revenue?
While I agree that the changes to the balance sheet are significant numerically, the proposed accounting is actually fairly straight forward and doesn’t contain nearly as many new concepts as the revenue standard. Most preparers will be able to read the leasing standard and come up with similar answers because so much is based on concepts they already deal with today. While people may dislike this change even more than the revenue standard, everyone has to admit figuring out the answers won’t be nearly as complicated.
You can hear more on the new leasing standard and other recent FASB developments during my presentation at the AICPA 2016 CFO Conference May 5-6 in New Orleans. To learn more about the conference go to www.AICPAStore.com/CFO.