By Keiter CPAs
Update: On Wednesday, June 3, 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2020-05, which granted a one-year delay on the required implementation dates of the new lease and revenue recognition standards for certain entities.
FASB Releases Lease Accounting Standard
The FASB finalized its standard on lease accounting on February 25, 2016. As anticipated the new standard upheld the requirement to put on the balance sheet all leases with fixed terms in excess of one year. The standard does have two separate accounting models for finance (i.e. capital) and operating leases. In summary:
Finance (Capital) Leases
Nothing really changes here. The right to use (asset) and obligation to pay (liability) are calculated based upon the present value of the lease payments. The asset is amortized and the interest on the obligation are recognized separately within the statement of net income. On the statement of cash flows, the principal portion of the payments are then classified as a financing activity.
Operating Leases
Big changes! Similar to a finance lease the right to use (asset) and obligation to pay (liability) are initially calculated based upon the present value of the lease payments. However, the cost of the lease is then allocated over the lease terms on a generally straight-line basis and presented as a single expense on the statement of net income. On the statement of cash flows, all cash payments are classified as an operating activity.
Also, it is worth noting that the FASB took a significantly different approach from that of the IASB. The IASB adopted the accounting described in the first bullet point (finance leases) for all leases with fixed terms in excess of one year.
Questions on how the new standards will impact your business? Contact your Keiter representative or 804.747.0000 | Email.
Additional Lease Accounting (ASC 842) Resources:
Appropriate Discount Rates for Leases Under ASC 842
Delay in Implementation of New Lease Standard?
How Does ASC 842 Impact Construction Companies?
What Construction Companies Should Consider When Implementing ASC 842
About the Author
Keiter CPAs
Keiter CPAs is a certified public accounting firm serving the audit, tax, accounting and consulting needs of businesses and their owners located in Richmond and across Virginia. We focus on serving emerging growth businesses and companies in the financial services, construction, real estate, manufacturing, retail & distribution industries and nonprofits. We also provide business valuations and forensic accounting services, family office services, and inbound international services.
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