October 2015 Lease Accounting Update

By | October 21, 2015

The lease accounting project is getting much closer to finalization. At its October meeting, the Financial Accounting Standards Board (“FASB” or “the Board”) discussed the comments received as a result of an external review of the latest draft document. Although a significant number of comments were received, the Board made few changes to the proposed standard. Three of the more significant conclusions were as follows:

  • The expense pattern for an operating lease following an impairment charge would be determined in the same manner as a financing lease.
  • The proposed guidance for a lease modification was different than the guidance for a lease reassessment because of a different manner of viewing the lease term. In the October meeting, the Board decided that the lease term is an attribute of the lease and that the original guidance for a lease modification should be changed. Therefore, whether the lease term is changed due to a lease modification or a lease reassessment, the right of use asset and the lease liability must be remeasured at the time of the modification or reassessment. This change will increase the number of situations requiring remeasurement and will eliminate a potential lease structuring opportunity.
  • The Private Company Council had proposed relief from the proposed standard for nonpublic companies with respect to recognition and presentation of lease assets and lease liabilities on the balance sheet. The FASB rejected those requests and determined that the new guidance should apply to both public and nonpublic companies.

The FASB will meet in November to discuss effective date and cost benefit issues. The Board is expected to issue a final standard by the end of this year. The effective date is not expected to be before January 1, 2018 and could be extended out to January 1, 2019. Remember that the new Revenue Standard effective date has been extended to January 1, 2018 and it will place an extreme burden on companies if they have to comply with both standards at the same effective date.

Because this standard has been debated for such an extended period, it is easy for finance and lease professionals to ignore the planning that will be required. But now we know that the standard will be final in the next few months and that it will apply to both public and nonpublic companies. If not already addressed, planning and preparation for implementation must start soon.

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