The Financial Accounting Standards Board (“FASB”) issued the new lease accounting standard on February 25, 2016.
As it pertains to lessees, the new standard requires that the liability for all leases (except narrowly defined short-term leases) must be recognized on the balance sheet of a lessee at the discounted present value of future lease payments with an offsetting right of use asset. For most leases, the pattern of expense recognition will stay the same although the new accounting model will require more sophisticated financial calculations and will mandate more monitoring and tracking of lease details.
The FASB decided that for public business entities, the final lease standard will be effective for fiscal years beginning after December 31, 2018 (essentially January 1, 2019) and for nonpublic business entities, the effective date would be for fiscal years beginning after December 15, 2019 (essentially January 1, 2020).
There is a lot to digest in the new standard but here are a few of the issues that we believe management should be considering sooner rather than later.
- The effective date may seem far into the future but now is the time to organize a Transition Team, if it is not already in place.
- The FASB allows lessees to early adopt the new standard. Is it better to fast track the adoption of the standard and not wait until the required effective date?
- Management should pay particular attention to the transition guidance and the practical expedients that are part of transition. Also remember that the standard requires adoption of the new guidance at the beginning of the earliest comparative period presented.
- The new guidance contains a new definition of what constitutes a lease. Important concepts in the new definition include whether there is an identified asset as part of the arrangement and whether the lessee has the right to control the use of the identified asset. Although most existing leases will meet this definition, some contracts may require additional judgment.
- As mentioned earlier, calculations of lease liabilities, right to use assets and related amortization will become more complex. Reassessment of initial calculations is required under certain circumstances. And extensive quantitative and qualitative footnote disclosures are required. Management should consider the need to revise policies and procedures and assess whether an enhanced technology solution is required.
Don’t shortcut the process. Start to plan now!