New lease standard

The new lease standard!

You're likely referring to the Accounting Standards Update (ASU) 2016-02, "Leases (Topic 842)" issued by the Financial Accounting Standards Board (FASB) in February 2016. This standard aims to improve financial reporting by providing a more comprehensive and consistent approach to accounting for leases.

Key changes:

  1. Definition of a lease: A lease is defined as a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
  2. Lessee accounting: Lessees (renters) will recognize a right-of-use asset and a lease liability on the balance sheet for all leases with a term of more than 12 months. The lease liability will be measured at the present value of the lease payments, and the right-of-use asset will be measured at the same amount.
  3. Lessor accounting: Lessors (landlords) will recognize a lease receivable and a lease asset on the balance sheet for all leases with a term of more than 12 months. The lease receivable will be measured at the present value of the lease payments, and the lease asset will be measured at the same amount.
  4. Transition: The new standard will be effective for public companies for fiscal years beginning after December 15, 2018, and for private companies for fiscal years beginning after December 15, 2019.
  5. Disclosure requirements: The standard introduces new disclosure requirements, including information about the nature of the leases, the lease terms, and the amounts recognized in the financial statements.

Benefits:

  1. Improved transparency: The new standard provides more comprehensive and consistent information about a company's lease obligations, which can help investors and analysts better understand the company's financial position and performance.
  2. Better alignment with economic reality: The standard recognizes that leases are a form of financing and requires companies to recognize the assets and liabilities associated with leases on their balance sheets.
  3. Simplification: The standard simplifies the accounting for leases by eliminating the distinction between capital and operating leases.

Challenges:

  1. Complexity: The new standard introduces new concepts and requirements, which can be complex and challenging to implement, especially for companies with large lease portfolios.
  2. Data collection and analysis: Companies will need to collect and analyze data about their leases, which can be time-consuming and resource-intensive.
  3. System updates: Companies will need to update their accounting systems and processes to accommodate the new standard.

To prepare for the new lease standard, companies should:

  1. Review and analyze their lease agreements: Identify all lease agreements and assess their terms, including the lease duration, payment amounts, and renewal options.
  2. Determine the lease classification: Determine whether each lease is a finance lease or an operating lease, and apply the relevant accounting requirements.
  3. Calculate the lease liability and right-of-use asset: Calculate the present value of the lease payments and recognize the lease liability and right-of-use asset on the balance sheet.
  4. Update accounting systems and processes: Update accounting systems and processes to accommodate the new standard and ensure accurate and timely financial reporting.
  5. Provide training and support: Provide training and support to accounting and finance teams to ensure they understand the new standard and can apply it correctly.