- Lessees must now recognize operating lease assets and liabilities on the balance sheet. This is the most significant change, since it will require all organizations and their accountants to take a different approach to lease accounting. Before this standard, U.S. GAAP only required this type of recognition for capital leases. Operating lease amounts were generally shown in the financial statements as rent expense on the income statement and in disclosures to the financial statements. In implementing the new guidance, entities will have to reconsider the ways they identify lease arrangements.
- The difference between a service contract and an operating lease will be important. Practitioners may be called on to help entities distinguish between the two, since organizations typically would not be required to recognize assets and liabilities related to a service contract.
- The lease term matters. Lessors are only required to recognize lease assets and liabilities for leases with terms of more than 12 months. When a lease has a shorter term, a lessee can elect not to recognize lease assets and lease liabilities, if it’s reasonably certain that the lessee will not exercise any option to buy the asset. The lessee must recognize expense for these leases generally on a straight-line basis over the lease term.
- The standard will have a broad reach. Affected leased assets include all property, plant and equipment, which might include anything from real estate and manufacturing equipment to the office printer.
- Some things will remain the same. As was the case under previous guidance, the way that a lessee recognizes, measures and presents lease-related expenses and cash flows will depend on whether it is a finance or operating lease. In addition, the accounting for lessors will also be relatively unchanged, but practitioners should prepare for potential challenges when accounting for significant variable lease payments
McVay Business Services is a QuickBooks, Payroll & Tax firm serving clients in multiple states.
Mike McVay, GAAP Tax Accountant