New Lease Rules - A Short Summary

Updated: Jul 3, 2018


As you may know the new FASB Accounting Standard Update or ASU 2016-02, Leases (Topic 842) (standard) is effective for public companies with a fiscal year beginning after December 15, 2018 or in other words starting on January 1, 2019 for most public companies. For nonpublic companies the beginning date is January 1, 2020. Early adoption is available and many companies have started that process.


If your company follows GAAP* and you have not already started the process of identifying your leases, you should start now. The new standard changes how leases are defined. Currently leases are typically categorized as operating or capital leases. For operating, the lease payments are expensed on the income statement and for capital leases, the assets are added to the balance sheet along with the liability. Under ASU 2016-02, leases are now referred to as finance or operating, both of which end up on your balance sheet as right of use assets. One ray of sunshine is that if a lease has a term or 12 months or less, you as the lessee, can adopt an accounting policy opting to not include the leased asset and liability on your balance sheet.


The amount of information required to implement the new standard is enormous. You must gather all of your lease documents (think copiers, computers, equipment buildings, etc.) and compile a list of the different leases that you have. You will need specific information (lease and non lease components, lease payments, termination option and amount, purchase option and amount, etc.) and if you do not have full copies of your lease agreements you will need to contact the lessor to obtain any missing information. If you only have a few leases and everything is centralized, this probably will not be a huge task for you. But, for companies that rely heavily on leases and/or have multiple locations, the task will take a long time. Many companies that have decided to adopt early have gone with software solutions to help manage their leases going forward. Companies that plan to rely on spreadsheets to store their leases and calculate the balances to add to their balance sheet might face more challenges. Whichever method you chose, it will take a significant amount of time on the front end to set everything up, so you should not wait until the last minute.


There are some great resources out there which go into a lot more detail. You should talk to your CPA for any advice and look at some of the early adopters.


Take a look at the following links, if you want to learn more:


AICPA

PWC - Impacts of the new leasing standard-beyond accounting

FASB

Journal of Accountancy - Tips for lease accounting implementation


#Leases #LeaseAccounting #ASU201602 #ASCTopic842 #Topic842


*Even if you do not issue financial statements, the new lease rules will have an impact on you as leases are being changed in general.

© 2018 by Mickele-Sade Nowden, CPA.