FASB issues new lease accounting standard

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On February 25, the FASB released ASU 2016-02, Leases, completing its project to overhaul lease accounting. The ASU codifies ASC 842, Leases, which will replace the guidance in ASC 840.

Entities should be aware of the following key points about the new FASB standard:

  • Lessees will be required to recognize most leases “on balance sheet.”
  • The new guidance retains a dual lease accounting model for purposes of income statement recognition, continuing the distinction between what are currently known as "capital" and "operating" leases for lessees.
  • Lessors will focus on whether control of the underlying asset has transferred to the lessee to assess lease classification.
  • A new definition of a “lease” could cause some contracts formerly accounted for under ASC 840 to fall outside the scope of ASC 842, and vice versa.
  • A modified retrospective transition will be required, although there are significant elective transition reliefs available for both lessors and lessees.

The new guidance is effective for public business entities in fiscal years beginning after December 15, 2018. The effective date for most other entities is deferred for one year, meaning that most calendar-year private companies will be required to adopt the new standard in 2020. Early adoption is permitted for all entities.