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FASB New Lease Standard Update

The new lease standard was issued by FASB on February 25, 2016. This new standard will change the way companies account for leases. These standards come into effect for public companies after December 15, 2018 and after December 15, 2019 for nonpublic companies.

It is highly recommended that companies begin to evaluate how this will affect them as soon as possible; as the new standards may have balance sheet and income statement effects. Companies should engage their accountants, bankers, and the end users of their financial statements, as well as any other interested parties when beginning the evaluation process.

For additional information on the new lease standards and their possible effects see the article published on January 6, 2016, or click here.

FASB’s New Lease Accounting Standard

According to FASB.org, “the FASB decided on a dual approach for lessee accounting, with lease classification determined in accordance with the principle in existing lease requirements. Using this approach, a lessee would account for most existing capital leases as Type A leases and most existing operating leases as Type B leases.”

  • For Type A leases, a lessee would do the following:
    • Recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments
    • Recognize and present the interest on the lease liability separately from the amortization of the right-of-use asset.
  • For Type B leases, a lessee would do the following:
    • Recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments
    • Recognize a single lease cost, combining the interest on the lease liability with the amortization of the right-of-use asset, on a straight-line basis.

The key distinctions a lease must meet in order for it to be classified as a Type A lease are:

  • The ease in transferring ownership of the asset to the lessee at the end of the lease term.
  • The lease includes an option for the lessee to purchase the asset, and the lessee has a significant economic incentive to do so.
  • Lease otherwise transfers substantially all the risks and rewards consistent with ownership of the asset:
    • The term represents a major portion of the remaining economic life of the underlying asset.
    • The present value of the lease payments plus the residual value guaranteed by the lessee represents a significant portion of the fair market value of the leased asset.
    • The leased asset is of a very specialized nature, and is expected to have no alternative use to the lessor at the end of the lease term.

Therefore, if one of the above conditions are not met, the lease is a Type B lease.

This new lease accounting standard will be required to be adopted by public companies with fiscal years beginning after December 15, 2018 and by non-public companies with fiscal years beginning after December 15, 2019. Early adoption and modified retrospective adoption will be permitted upon issuance of the standard.

Information compiled by David Neiman, Madalyn Greth, and Kyle Levengood. For additional information please contact Robert Firely at rffirely@herbein.com.