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New Lease Accounting Standards – Part 3

New Lease Accounting Standards – Part 3

As discussed in the previous two blogs, New Lease Accounting Standards Part 1 and Part 2, the Federal Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-02, Leases (Topic 842) on February 25, 2016. Once determining which classification the lease falls within, finance or operating, the lessee must comply with the new reporting requirements.

For a lease classified as a finance lease, a lessee is required to do the following:

  1. Recognize a right-of-use asset and a lease liability, initially measures at the present value of the lease payments, in the statement of financial position.

  2. Recognize interest on the lease liability separately from amortization of the right-of-use asset in the statement of comprehensive income.

  3. Classify repayments and the principle portion of the lease liability within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows.

For an operating lease, a lessee is required to do the following:

  1. Recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position.

  2. Recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis.

  3. Classify all cash payments within operating activities in the statement of cash flows.

In the next blog, we will take a look at some other components of the new Update. In the meantime, if you have any questions, please contact the Center for Financial, Legal, and Tax Planning, Inc.

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