New Accounting for the Same Old Lease
By Heidi DeVette, CPA, Manager & Samanthan Gilson, CPA, Associate
Nearly ten years in the making, the FASB’s accounting standards update (ASU) on leases has been issued! There is minimal impact to lessors accounting. However, depending on the type of lease, lessees may see some major changes to their accounting. FASB’s goal with this ASU is to make lease accounting more transparent for financial statement users.
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Currently, leases are either capital or operating. Capital leases are recorded on the balance sheet and income statement. Operating leases are recorded on the income statement only. Going forward, entities will have three lease classifications to choose from:
- Finance – Essentially the same as the current capital lease classification
- Operating – Will now be recorded on the balance sheet
- Short-term – Organizations can make an accounting policy election to recorded leases with a term of 12 months or less on the income statement only
At a high level the changes seem simple, but the details are always the most difficult part. Below are some questions to contemplate as you start down the path to proper implementation.
- Have you identified all of your leases? Certain leases, such as standalone leases, are usually easy to identify, but you need to review your service contracts to see if they have embedded leases. You can bifurcate the lease and account for it separately from the service element of the contract or elect the practical expedient and account for the entire contract as a lease.
- Do you have an appropriate mechanism in place to track and record your leases? A spreadsheet may work for entities with a small and simple lease inventory, but others may need to purchase software to ensure proper tracking.
- How will the new guidance impact your internal control structure? The new standard could require more formal procedures around negotiating leases, entering into leases, and tracking leases throughout their lives.
- Could this impact debt covenants? Now that operating leases have a balance sheet impact, will you still be in compliance with all debt covenants? Can the debt covenants be calculated to exclude the additional liabilities?
- For entities impacted by the new revenue recognition standard, how do you effectively implement both standards at once?
These are only a few of the questions you’ll need to ask as you work through the nuances of the new standard.
The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after 12.15.18 for public companies. For all other entities, the ASU is effective for fiscal years beginning after 12.15.19 and for interim periods within fiscal years beginning after 12.15.20. Early application is permitted.
Please contact us with any questions on how the new lease standard impacts your organization.
Heidi DeVette, CPA, Manager: firstname.lastname@example.org
Samantha Gilson, CPA, Associate: email@example.com