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New Accounting Standard for Leases Under ASU 2016-02

11.08.2017

Published in 2016, ASU 2016-02, Leases, is effective in 2019 for most public companies (including those meeting the criteria of PBEs), and 2020 for most private companies. The project took more than a decade to complete and was the subject of intense public scrutiny every step of the way. It received significant opposition from businesses that expect to add many billions of dollars in assets and liabilities to their balance sheets once the accounting standard becomes effective.

The following changes should be noted:

For operating leases, a lessee is required to do the following:

  • Recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position.
  • Recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis.
  • Classify all cash payments within operating activities in the statement of cash flows.

For finance leases, a lessee is required to do the following:

  • Recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position.
  • Recognize interest on the lease liability separately from amortization of the right-of-use asset in the statement of comprehensive income.
  • Classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows.

One significant area that will receive scrutiny under the new lease accounting standards will be structured leases whereby the underlying intent of the reporting entity would provide for a longer term than that which is actually structured in an executed lease agreement. Assuming the goal of structuring the corresponding term of the lease agreement is an attempt by the reporting entity to minimize the impact of the new standard, audit firms will be in a position to propose adjustments to audited financial statements, which ultimately could lead to deficiency communications to those charged with governance.  This will be a particularly sensitive topic when analyzing related party lease arrangements.  

For broker-dealers, these changes are effective for fiscal years beginning after December 15, 2018.

To schedule a meeting to further evaluate your situation and how these updates may impact you, please submit your information through "Schedule a Meeting" above.

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