[vc_row anchor=”#pe” margin_top=”0″ margin_bottom=”0″ padding_left=”40″ padding_right=”40″ bg_position=”top” bg_repeat=”no-repeat” bg_cover=”false” bg_attachment=”false” padding_top=”40″ padding_bottom=”40″ parallax_speed=”0.1″][vc_column width=”2/3″][vc_column_text]
During the first quarter of 2016, the FASB will issue its new standard on Leases. While the standard will represent a significant improvement to financial reporting, it also will be a change for many organizations—particularly those who engage in significant activities as a lessee.
Under the new standard, lessor accounting is fundamentally consistent with existing GAAP. What follows is a snapshot of what a lessee should know at this stage to facilitate a successful transition to the new guidance.
[/vc_column_text][/vc_column][vc_column width=”1/3″][vc_single_image image=”6817″ border_color=”grey” img_link_target=”_self” img_size=”full” alignment=”right” style=”vc_box_shadow”][/vc_column][/vc_row][vc_row anchor=”#bp” margin_top=”0″ margin_bottom=”0″ padding_left=”40″ padding_right=”40″ bg_position=”top” bg_repeat=”no-repeat” bg_cover=”false” bg_attachment=”false” padding_top=”40″ padding_bottom=”40″ parallax_speed=”0.1″][vc_column width=”1/1″][dt_gap height=”30″][dt_fancy_title title=”BIG PICTURE: WHAT’S CHANGING?” title_align=”left” title_size=”h5″ title_color=”default” title_bg=”disabled” separator_color=”default” el_width=”100%”][dt_gap height=”20″][vc_column_text]
The new leases standard will increase transparency and comparability among organizations that lease buildings, equipment, and other assets by recognizing the assets and liabilities that arise from lease transactions. In other words, current off-balance sheet leasing activities will be required to be reflected on balance sheets so that investors and other users of financial statements can more readily and accurately understand the rights and obligations associated with these transactions.
[/vc_column_text][dt_gap height=”20″][/vc_column][/vc_row][vc_row anchor=”#lt” margin_top=”0″ margin_bottom=”0″ padding_left=”40″ padding_right=”40″ bg_position=”top” bg_repeat=”no-repeat” bg_cover=”false” bg_attachment=”false” padding_top=”40″ padding_bottom=”40″ parallax_speed=”0.1″][vc_column width=”1/1″][dt_gap height=”30″][dt_fancy_title title=”LEASE TYPES: FINANCE LEASES AND OPERATING LEASES” title_align=”left” title_size=”h5″ title_color=”default” title_bg=”disabled” separator_color=”default” el_width=”100%”][dt_gap height=”20″][/vc_column][/vc_row][vc_row anchor=”#cl” margin_top=”0″ margin_bottom=”0″ padding_left=”40″ padding_right=”40″ bg_position=”top” bg_repeat=”no-repeat” bg_cover=”false” bg_attachment=”false” padding_top=”40″ padding_bottom=”40″ parallax_speed=”0.1″][vc_column width=”1/4″][dt_quote type=”pullquote” font_size=”big” background=”plain” animation=”right”]
“The standard will increase transparency and comparability among organizations that lease buildings, equipment, and other assets by recognizing the assets and liabilities that arise from lease transactions.”
[/dt_quote][/vc_column][vc_column width=”3/4″][vc_column_text]
The FASB lessee accounting model retains two types of leases, and is consistent with the lessee accounting model under existing GAAP.
[dt_gap height=”10″ /]
One type of lease (finance leases) will be accounted for in substantially the same manner as capital leases are accounted for under existing GAAP.
[dt_gap height=”10″ /]
The other type of lease (operating leases) will be accounted for (both in the income statement and statement of cash flows) in a manner consistent with operating leases under existing GAAP. However, as it relates to the balance sheet, lessees will recognize lease liabilities based upon the present value of remaining lease payments and corresponding lease assets for operating leases with limited exception.
[dt_gap height=”10″ /]
The new leases standard also will require lessees and lessors to provide additional qualitative and quantitative disclosures to help financial statement users assess the amount, timing, and uncertainty of cash flows arising from leases. These disclosures are intended to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an organization’s leasing activities.[/vc_column_text][/vc_column][/vc_row][vc_row anchor=”#hsp” margin_top=”0″ margin_bottom=”0″ padding_left=”40″ padding_right=”40″ bg_position=”top” bg_repeat=”no-repeat” bg_cover=”false” bg_attachment=”false” padding_top=”40″ padding_bottom=”40″ parallax_speed=”0.1″][vc_column width=”1/1″][dt_gap height=”10″][dt_gap height=”30″][dt_fancy_title title=”HOW SHOULD PREPARERS GET READY FOR THE TRANSITION?” title_align=”left” title_size=”h5″ title_color=”default” title_bg=”disabled” separator_color=”default” el_width=”100%”][dt_gap height=”20″][vc_column_text]Early action is key to a successful transition. As soon as possible—even prior to the issuance of the new leases standard—preparers should consider creating a transition timeline and action plan.
[dt_gap height=”10″ /]
For public companies, the new standard will be effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018.
[dt_gap height=”10″ /]
For private companies, the new standard will be effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
[/vc_column_text][dt_gap height=”10″][/vc_column][/vc_row][vc_row anchor=”#ls” margin_top=”0″ margin_bottom=”0″ padding_left=”40″ padding_right=”40″ bg_position=”top” bg_repeat=”no-repeat” bg_cover=”false” bg_attachment=”false” padding_top=”40″ padding_bottom=”40″ parallax_speed=”0.1″][vc_column width=”3/4″][vc_column_text][dt_gap height=”10″ /]
Early application will be permitted for all organizations upon issuance of the standard.
[dt_gap height=”10″ /]
The Board decided that a modified retrospective approach for transition, as opposed to a full retrospective approach, provides an appropriate balance between minimizing costs of transition and providing users of financial statements with comparable financial information. The practical expedients related to transition, if elected, should further significantly reduce the costs associated with transitioning to the new requirements.
[dt_gap height=”10″ /]
The new standard is not industry-specific, so it will not necessarily affect one industry more than others. However, as mentioned earlier, the more significant the leasing activity, the greater the potential for a significant balance sheet impact.[/vc_column_text][/vc_column][vc_column width=”1/4″][dt_quote type=”pullquote” font_size=”big” background=”plain” animation=”left”]
“As soon as possible—even prior to the issuance of the new leases standard—preparers should consider creating a transition timeline and action plan.”
[/dt_quote][/vc_column][/vc_row][vc_row anchor=”#wdt” margin_top=”0″ margin_bottom=”0″ padding_left=”40″ padding_right=”40″ bg_position=”top” bg_repeat=”no-repeat” bg_cover=”false” bg_attachment=”false” padding_top=”40″ padding_bottom=”40″ parallax_speed=”0.1″][vc_column width=”1/1″][dt_gap height=”10″][dt_gap height=”30″][dt_fancy_title title=”WHAT DOES “TRANSITION“ INVOLVE FOR A LESSEE?” title_align=”left” title_size=”h5″ title_color=”default” title_bg=”disabled” separator_color=”default” el_width=”100%”][dt_gap height=”20″][vc_column_text]In many respects, the final standard can be thought of as moving operating lease obligations from the footnotes to the balance sheet; basically a change in display. Based on substantial outreach with financial statement preparers, the FASB expects that most lessees will be able to meet those reporting and disclosure requirements by leveraging existing systems and processes.
[dt_gap height=”10″ /]
In leveraging existing systems, organizations will need to make sure financial reporting personnel are educated regarding the application of the new standard as there are changes in the details. For example, the definition of a lease (while generally consistent with GAAP today) may, for a subset of less common transactions, require organizations to undertake activities to ensure they have appropriately identified all of their leases.
[dt_gap height=”10″ /]
Furthermore, implementation of the new standard may be a good opportunity for organizations to challenge the efficiency and effectiveness of existing processes and controls, particularly those related to ensuring all material leasing activity is accounted for.[/vc_column_text][/vc_column][/vc_row][vc_row anchor=”#iia” margin_top=”0″ margin_bottom=”0″ padding_left=”40″ padding_right=”40″ bg_position=”top” bg_repeat=”no-repeat” bg_cover=”false” bg_attachment=”false” padding_top=”40″ padding_bottom=”40″ parallax_speed=”0.1″][vc_column width=”1/1″][dt_gap height=”10″][dt_gap height=”30″][dt_fancy_title title=”INITIAL IMPLEMENTATION ACTIVITIES” title_align=”left” title_size=”h5″ title_color=”default” title_bg=”disabled” separator_color=”default” el_width=”100%”][dt_gap height=”20″][vc_column_text]While initial implementation activities will require some level of effort for lessees, the ongoing costs of providing the information are expected to be consistent with the costs of complying with existing GAAP.
[dt_gap height=”10″ /]
That’s because, under existing GAAP, organizations are similarly required to:
[dt_gap height=”10″ /]
[dt_list style=”1″ bullet_position=”middle” dividers=”true”]
[dt_list_item image=””]Identify leases[/dt_list_item]
[dt_list_item image=””]Evaluate each lease to determine the applicable accounting model to apply (capital or operating), and[/dt_list_item]
[dt_list_item image=””]Subsequently account for each lease, including meeting the ongoing disclosure requirements about cash flows from leases.[/dt_list_item][/dt_list]
The new standard will not substantially change this level of effort.[/vc_column_text][dt_gap height=”20″][/vc_column][/vc_row][vc_row anchor=”#tpr” margin_top=”0″ margin_bottom=”0″ padding_left=”40″ padding_right=”40″ bg_position=”top” bg_repeat=”no-repeat” bg_cover=”false” bg_attachment=”false” padding_top=”40″ padding_bottom=”40″ parallax_speed=”0.1″][vc_column width=”1/1″][dt_gap height=”10″][dt_gap height=”30″][dt_fancy_title title=”TRANSITION PLANNING RECOMMENDATIONS” title_align=”left” title_size=”h5″ title_color=”default” title_bg=”disabled” separator_color=”default” el_width=”100%”][dt_gap height=”20″][/vc_column][/vc_row][vc_row anchor=”#ma” margin_top=”0″ margin_bottom=”0″ padding_left=”40″ padding_right=”40″ bg_position=”top” bg_repeat=”no-repeat” bg_cover=”false” bg_attachment=”false” padding_top=”40″ padding_bottom=”40″ parallax_speed=”0.1″][vc_column width=”3/4″][vc_column_text]As a part of transition planning, organizations may want to form a transition team that includes individuals from departments other than accounting and external reporting.
[dt_gap height=”10″ /]
For example, with the addition of leases to the balance sheet, organizations should review existing contractual agreements, such as lending covenants, to seamlessly adjust to the new standard. Accordingly, it may be wise to include treasury, legal departments, and others as part of a transition team.
[dt_gap height=”10″ /]
Finally, but perhaps most importantly, organizations will want to explain the effects of the changes in accounting for leases on the organization’s financial statements to boards of directors, investors, and other users of financial statements.
[dt_gap height=”10″ /]
More information can be found on FASB the project page. Article reprinted with permission of the Financial Accounting Standard Board.
[dt_gap height=”10″ /][/vc_column_text][dt_gap height=”30″][/vc_column][vc_column width=”1/4″][dt_quote type=”pullquote” font_size=”big” background=”plain” animation=”right”]
“As a part of transition planning, organizations may want to form a transition team that includes individuals from departments other than accounting and external reporting.”
[/dt_quote][/vc_column][/vc_row]