After almost a decade of planning, the Financial Accounting Standards Board (FASB) issued a new standard on accounting for leases (ASU 2016-02) in February 2016.
The standard went into effect for Public Business Entities at the end of 2018, however, this new guideline impacts entities across all industries that enter lease arrangements and sign contracts containing leases to support their business operations.
Effective Dates for New Lease Accounting Standards:
Public Business Entities: already effective for public business entities (fiscal years beginning after Dec. 15, 2018)
Nonpublic Business Entities: effective for fiscal years beginning after Dec. 15, 2021*
*In June 2020, the Financial Accounting Standards Board (FASB) issued ASU 2020-05, which provided an additional one-year delay in the effective date for nonpublic business entities.
Defining a Lease
The new leasing standard represents a change in guidance for the definition of a lease, and entities are now required to identify whether a contract contains a lease when it is initiated.
A contract is defined as a lease if it gives a customer the right to control the use of the identified property, plant, or equipment for any period in exchange for consideration.
Control is considered to exist if the customer has:
- The "right to obtain substantially all of the economic benefits from use of an asset."
- The "right to direct the use of that asset."
This definition differs from the existing US Generally Accepted Accounting Principals (GAAP), which requires the lessee to meet only the first requirement.
Under the new standard, it's up to the entity to determine whether it obtains the "right to direct the use" of the asset.
The new standard also requires organizations to identify the lease and nonlease components of any contract containing a lease.
While this requirement is the same as under existing US GAAP, the impact of not applying this requirement is more significant because most leases must be recognized on the balance sheet under the new guidance.
In addition, changes to the financial presentation and footnote disclosures will be necessary to properly reflect the right-of-use assets and lease liabilities, payments, terms, etc.
Contact us below to receive a Lease Accounting Template Tool or a CPEA ASC 842 Lease Checklist Tool