New Lease Accounting Standards – Part 4

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. Under the new guidance, almost all leases will require balance sheet recognition as a right-of-use asset and lease liability. Further, the lease classification will affect the amount and timing of the lease and income expense.

It is important to understand that lease contracts may contain non-lease components that should be accounted for using separate accounting models. Only components essential to the right to use the underlying asset are considered lease components. Additionally, updated March of 2017, ASU 842 requires a reporting entity to allocate between the components of the lease arrangement. This type of allocation between components will provide clarity and proper recording of assets and liabilities associated with non-lease components.

To be considered a lease component, an activity must transfer a good or service in an arrangement that provides the customer with a right to use the good or service. Yet, an example of an activity related to a lease not subject to ASU 842 guidance would be a supplier who leases a vehicle but also operates the leased vehicle on behalf of the customer. The service is not related to securing the truck and thus, not a lease component under ASU 842.

As you can see, these new accounting guidelines for leases can make a major difference in a company’s balance sheet in the future. If you have any questions, please contact the Center for Financial, Legal, and Tax Planning, Inc.