Are you prepared to implement the new lease accounting standard?

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842).  The new standard significantly changes the accounting and reporting requirements for leases.  After several deferrals by the FASB, the effective date for non-public organizations is nearly here: it will be effective for 2022 for organizations with December 31 year-ends.  Public organizations have already adopted it.

New Lease Accounting Standard

The new lease standard requires virtually all leasing activity with initial terms of more than twelve months to be recognized on the balance sheet with a right of use asset and a lease liability.  While there are some exclusions, the standard includes all real estate, building, vehicle, and office equipment leases.  Organizations can elect not to apply the new standard to short-term leases of less than 12 months; all other leasing activity will have to be capitalized.

As a result, after adopting the new standard, many organizations will be recognizing lease assets (referred to as right of use assets) and lease liabilities on their balance sheets.  Even if an organization only has a lease or two, the impact can be significant