In 2016, the Financial Accounting Standards Board released an Accounting Standards Update intended as a broad measure to improve financial reporting of leasing transactions.
In February, the Financial Accounting Standards Board (FASB) released new guidance on lease accounting, which significantly affects all entities that lease assets. Representatives from the FASB have maintained that the updated guidance will provide investors, lenders and financial statement users with a more honest and open representation of entities’ leasing activity.
The update requires organizations that lease assets with terms greater than 12 months in duration to recognize the assets and liabilities on the balance sheet. Unlike the Generally Accepted Accounting Principles (GAAP), the update requires both financial and operating leases to be recognized. In addition to the updates on balance sheet reporting, the FASB lease accounting guidelines now require lessees to include disclosures within financial reports that will provide investors with a better understanding of the cash flows stemming from leases.
The FASB Accounting Standards Update will affect all public companies and organizations that lease assets, including property and equipment, beginning December 15, 2018. While companies are permitted to adopt the new accounting standards earlier than this date, all entities will be required to employ these standards using a modified retrospective transition approach by the effective date.
The modified retrospective transition approach that is required by the FASB will provide entities with a method for documenting existing leases on lessee’s balance sheets at adoption and in comparative periods, which would then approximate the results of a full retrospective approach. Accounting adjustments for leases that expire before the date of initial application will not be necessary during this transition period.
It is essential that company executives and management personnel begin to consider how these updates will affect current and future leasing agreements, as the changes to lease accounting standards released by the FASB will significantly alter the way affected entities report on leasing activity and assemble financial statements. Companies may also find it necessary to adjust internal financial systems and processes to account for the increased reporting and disclosure requirements.
Further, the transition to the new standard may have a large effect on internal decision-making and the overall representation of a company’s financial situation. Thus, it may be beneficial to discuss the transition and its potential impact with an experienced accountant.
bgr CPAs professionals have helped clients throughout the Mid-Atlantic region for over 75 years. We have companies within various industries their tax, accounting, and business needs. To learn more about the FASB’s Accounting Standards Update regarding lease accounting, or to speak with a financial advisor and accountant about how this update may affect your company, please contact Marc Rubin, CPA, CVA firstname.lastname@example.org or 410-418-4400.