Note: On Wednesday, October 16, the Financial Accounting Standards Board (“FASB”) unanimously approved the proposal to delay the effective dates for three new major accounting standards.
FASB 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.
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.
Additional Lease Accounting (ASC 842) Resources:
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.