FASB finalizes its standard on lease accounting

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By Toby R. Leslie, Business Assurance & Advisory Services Partner

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.

Read previous articles on this topic.
FASB News Release


About the Author

Toby has over 16 years of experience at Keiter creating opportunities and providing accounting and auditing services.  He participates in various client services including financial statement audits, reviews and compilations, acquisition due-diligence, consulting, and other agreed-upon procedures. Read more of Toby's accounting insights on our blog.

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