U.S. companies will be required to add leases to their balance sheets under an overhaul of the lease accounting rules by the FASB. Accounting Standards Update (ASU) No. 2016-02, Leases, will apply to both capital (aka finance) and operating leases. Up to now, GAAP has required only capital leases to be recognized on lessee balance sheets.
Key impact: Lessees will be required to recognize the value of assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. While a company’s book value isn’t likely to change significantly under the new rule, some financial ratios (e.g., return on assets) could be affected because companies will appear more leveraged.
As under current GAAP, the accounting for a lease primarily will depend on its classification as a capital or operating lease: For capital leases, lessees will recognize amortization of the right-of-use asset separately from interest on the lease liability. For operating leases, lessees will recognize a single total lease expense.
Out of synch: The International Accounting Standards Board (IASB) also recently issued a final lease standard (IFRS 16, Leases) that will require companies to bring leases onto the balance sheet. In the January 27 issue of BVWire, we reported that it would not be fully converged with the FASB standard, which is how it panned out. The IASB and FASB agree on many points, including the requirement that all leases of more than 12 months be recognized on lessee balance sheets. But they diverge in some respects, including lease classification. The FASB standard uses a dual-reporting model for lessees, while the IASB standard uses a single-classification model that requires lessees to account for all leases as capital (finance) leases.
The FASB standard will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018. For all other organizations, the ASU on leases will take effect for fiscal years beginning after Dec. 15, 2019, and for interim periods within fiscal years beginning after Dec. 15, 2020. Early application will be permitted for all organizations.
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