By Andrew Prather, CPA
On November 11, 2015, the Financial Accounting Standards Board (FASB) voted to proceed with issuing a new accounting standard for leases. This new accounting standard will require all entities that follow U.S. generally accepted accounting principles for financial reporting to include lease obligations on their balance sheets.
This new accounting standard is the result of a 10-year process that started with promptings for improvements to lease accounting from the SEC and other stakeholders.
Highlights of this new accounting standard include:
- Right-of-use principle: The basic principle that underlies this new standard is that a lease conveys the right to control the use of the leased asset and gives rise to a liability that should be reflected on the balance sheet.
- Different income statement reporting: Expense recognition will differ depending on the type of lease, which the FASB has been referring to as Type A and Type B leases. Type A leases are those similar to current capital leases and will be expensed via amortization of the lease asset and interest recognized on the lease liability. Type B leases are those similar to current operating leases and will be expensed via a straight-line lease expense over the term of the lease.
- Lessor accounting: Accounting by lessors will generally follow the current model of financing/sale leases and operating leases.
- Short-term leases: Leases with a term of one year or less are exempt from the requirement to recognize the lease asset and liability.
The specific details of the new accounting standards will be made known when a final standard is published in early 2016.
The FASB decided that the new accounting requirements will be effective for fiscal years beginning after December 15, 2018 for publicly traded companies and certain not-for-profit organizations with publicly-traded debt. For private companies and all other not-for-profit organizations, the new requirements will be effective for years beginning after December 15, 2019.
Clark Nuber will continue to keep you updated as this process continues. Please contact your Clark Nuber service team if you would like to discuss how these new accounting requirements for leases might specifically impact your organization.
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