"Contractual arrangements by which a lessor (owner) provides a lessee (user) the right to use an asset for a specified period of time."
Organizations are frequently faced with the option to buy or lease assets to achieve their business goals.
The arrangement must be non-cancelable and meet at least one of the following four criteria
- The agreement specifies that ownership of the asset transfers to the lessee.
- The agreement contains a bargain purchase option.
- The non-cancelable lease term is equal to 75% or more of the expected economic life of asset.
- The present value of the "minimum lease payments" is equal to or greater than 90% of the fair value of the asset."
Any lease that is not a capital lease is considered an operating lease.
Why do we need new standards?
- Operating leases do not show up on the balance sheet.
- Errors can be introduced in assumptions and estimates.
In 2005, the SEC encouraged the FASB to begin working on revising the lease standards.
ASU No. 2016-02
- Accounting Standards Update No. 2016-02 was issued on February 25, 2016.
- The definition of a lease and the criteria for classifying leases have stayed the same.
- The biggest change is in the "critical determination" of the lease.
ASU No. 2016-02
- Organizations must identify and classify their leases, and account for both capital and operating.
- The accounting varies slightly based on classification.
Step 2: Recording Payments
- Interest on lease liability and amortization of the asset are recorded separately on the statement of comprehensive income.
- Statement of Cash Flows: repayments of principal are recorded in the finance section, interest and variable lease payments are recorded in the operating section
- A single lease cost recorded on a straight-line basis.
- Statement of Cash Flows: all cash flows are recorded in the operating section.
- Short-term leases have freedom in accounting principle.
- Disclosures are qualitative and quantitative.
- Lessee accounting has only experienced small changes (definitions, revenue recognition).
- GAAP vs. IFRS
Implications for Implementation
The update is effective beginning December 15, 2018 for the majority of organizations.
Things to consider when implementing the new standards.
- Update Lease Inventories
- Identify Cost Savings
- Different Rules
Accounting Standards Update 2016-02, Leases (Topic 842), provides users of financial data with a transparent and comparable view of leases, and bring positive change to accounting for such obligations.
Fafatas, S., & Fischer, D. (2016). The Effect of the New Lease Accounting Rules on Profitability Analysis in the Retail Industry. Journal of Corporate Accounting & Finance,28(1), 19-31. doi:10.1002/jcaf.22206
FASB. (2016, February 25). Update 2016-02-Leases (Topic 842) Section A-Leases: Amendments to the FASB Accounting Standards Codification®. Retrieved February 22, 2017, from http://fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176167901010&acceptedDisclaimer=true
James, M. L. (2016). ACCOUNTING FOR LEASES: A CASE EXPLORING THE EFFECT OF THE NEW LEASE ACCOUNTING STANDARD ON THE FINANCIAL STATEMENTS. Journal of the International Academy for Case Studies, 22(3), 152-157. Retrieved from http://ezproxy.liberty.edu/login?url=http://search.proquest.com/docview/1847565650?accountid=12085
NEW FASB LEASE ACCOUNTING GUIDANCE MOVES MOST LEASES TO BALANCE SHEET. (2016). Bank Auditing and Accounting Report, 49(6), 1-2. Retrieved from http://ezproxy.liberty.edu/login?url=http://search.proquest.com/docview/1788219142?accountid=12085
Rosenhouse, M. A., Esq. (2016). FASB UPDATES LEASING STANDARDS, CREATING NEW CODIFICATION TOPIC. SEC Accounting Report, 42(5), 1-3. Retrieved from http://ezproxy.liberty.edu/login?url=http://search.proquest.com/docview/1783997105?accountid=12085
Spiceland, J. D., Sepe, J. F., Nelson, M. W., & Thomas, W. B. (2016). Intermediate Accouting (8th ed.). New York, NY: McGraw-Hill Education.
Tysiac, K. (2016, January 12). IASB issues leases standard; FASB to follow. Retrieved February 22, 2017, from http://www.journalofaccountancy.com/news/2016/jan/iasb-issues-leases-standard-201613694.html
Tysiac, K. (2016, February 25). New FASB Leases Standard Brings Transparency to Lessee Balance Sheets. Retrieved February 22, 2017, from http://www.journalofaccountancy.com/news/2016/feb/fasb-issues-leases-standard-201613941.html
Tysiac, K. (2016, February 26). How to Comply with the New Leases Standard. Retrieved February 22, 2017, from http://www.journalofaccountancy.com/news/2016/feb/how-to-comply-with-new-leases-standard-201613910.html