The Financial Accounting Standards Board (FASB) issued an update on the new accounting standards intended to improve financial reporting of leasing transactions.
The new standards affect all companies and other organizations that lease assets such as real estate, airplanes and manufacturing equipment. They 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,” said FASB Chair Russell G. Golden. “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. The guidance also reflects the input we received during our extensive outreach with preparers, auditors and other practitioners, whose feedback was instrumental in helping us develop a cost-effective, operational standard.”
Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new standards will require both types of leases to be recognized on the balance sheet.
“We welcome the release of the new lease accounting standard from the Financial Accounting Standards Board. After many years of anticipating the new standard and attendant uncertainty in the marketplace, companies can now move forward and prepare to adopt it,” said Ralph Petta, president and CEO of the Equipment Leasing and Finance Association. “The good news is that under the new lease accounting rules, businesses nationwide will continue to enjoy the benefits of engaging in the $1 trillion U.S. equipment finance industry, which promotes business expansion, job creation and U.S. economic growth.”
The new standards also will require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements.
The accounting by organizations that own the assets leased by the lessee, also known as lessor accounting, will remain largely unchanged from current GAAP. However, the new standards contain some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014.
“Although the new standard will change how leases are accounted for on corporate balance sheets, it will not impact the ability of companies to acquire productive equipment to grow their businesses,” said Petta. “There are many reasons to lease equipment, and the primary reasons will remain intact under the new rules, from maintaining cash flow, to preserving capital, to obtaining flexible financial solutions, to avoiding obsolescence.”
The new standards on leases will 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 standards will take effect for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020.
“When the new FASB and IASB leases standards take effect, they’ll provide investors across the globe with more transparent, comparable information about lease obligations held by companies and other organizations,” said Golden.
Established in 1973, the FASB is the independent, private-sector organization, based in Norwalk, CT, that establishes financial accounting and reporting standards for public and private companies and not-for-profit organizations that follow GAAP.
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