In the following blog post, SC&H Group’s Audit Services team highlights a new Accounting Standards Update (ASU) from the Financial Accounting Standards Board (FASB) that aims to improve financial reporting with regards to leasing transactions.
Today, many organizations lease assets such as real estate, trucks, and manufacturing equipment as a means for gaining access to assets, obtaining financing, and reducing the full risks of asset ownership.
However, current accounting practices for leases have been criticized for failing to adequately portray an entity’s obligations, as well as the associated rights, under leasing transactions on the balance sheet.
This is why the FASB recently issued its ASU 2016-02, Leases (Topic 842), which aims to improve financial reporting for leasing transactions. According to the FASB, this ASU will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases.
“The new guidance responds to requests from investors and other financial statement users for a more faithful representation of an organization’s leasing activities,” stated FASB Chair Russell G. Golden, in this press release. “It ends what the U.S. Securities and Exchange Commission and other stakeholders have identified as one of the largest forms of off-balance sheet accounting, while requiring more disclosures related to leasing transactions.”
According to an article in the April 2016 issue of the Thomson Reuters PPC Accounting and Auditing Update, under the guidance in the ASU, lessees are required to account for finance and operating leases as follows:
- Finance Leases. Interest on the lease liability is required to be recognized separately from the amortization of the right-of-use asset in the statement of comprehensive income. Repayments of the principal portion of the lease liability are to be classified as financing activities in the statement of cash flows, while payments of interest on the liability and variable lease payments are to be classified as operating activities.
- Operating Leases. A single lease cost is to be recognized in the statement of comprehensive income based on the allocation of the cost of the lease over the lease term, generally on the straight-line basis. All cash payments are to be classified within operating activities on the statement of cash flows.
The FASB said the ASU would take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other organizations, the ASU on leases will take effect for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020.
If you have questions about this new ASU and how it will impact your financial reporting with leasing transactions, please contact the SC&H Group Audit Services team here.