New Lease Accounting Standards – Part 1

On February 25, 2016, the Federal Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-02, Leases (Topic 842). The FASB’s goal in doing so is to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and to require the disclosure of key information surrounding lease arrangements. In doing so, these new standards will result in a more faithful representation of the rights and obligations arising from leases.

The pursuit of faithful representation requires lessees to recognize lease assets and liabilities that arise from leases in the statement of financial position. Moreover, the standards seek disclosure of lease transaction information in regard to lease payments, options to renew, and lease termination. Furthermore, the new standards aim to improve the understanding of lessees’ financial commitments while aligning lessor accounting and sales.

The new standards are effective for fiscal years beginning after December 15, 2018 and will affect any organization that enters into a lease or sublease, with some specified exceptions. The FASB defines a lease as “a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.” Over the next three blogs, we will take a look at different sections of this update and how it effects those entities with leases. If you have any questions, please contact the Center for Financial, Legal, & Financial Planning, Inc.